COLUMBIA BANKING SYSTEM INC, 424B1, 1996-11-12

COLUMBIA BANKING SYSTEM INC
424B1, 1996-11-12
SAVINGS INSTITUTION, FEDERALLY CHARTERED

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As Filed pursuant to Rule 424(b)(1)
Registration No. 333-14465

1,285,000 SHARES

COLUMBIA BANKING SYSTEM LOGO

COMMON STOCK

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All of the shares of Common Stock, no par value per share (the "Common
Stock"), offered hereby are being sold by Columbia Banking System, Inc. (the
"Company"). The Common Stock is quoted on the Nasdaq National Market under the
symbol COLB. On November 11, 1996, the last reported sale price for the Common
Stock on the Nasdaq National Market was $16.00 per share. See "Price Range of
Common Stock."

------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 9.
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THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENTAL AGENCY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------
Per Share................................ $15.50 $0.98 $14.52
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Total(3)................................. $19,917,500 $1,259,300 $18,658,200
- -----------------------------------------------------------------------------------------------
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</TABLE>

(1) See "Underwriting" for information relating to indemnification of the
Underwriters.

(2) Before deducting expenses of the offering estimated at $275,000.

(3) The Company has granted the Underwriters a 30-day option to purchase up to
192,750 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent the option is exercised, the Underwriters will offer
the additional shares at the Price to Public shown above. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to the Company will be $22,905,125, $1,448,195 and
$21,456,930, respectively. See "Underwriting."

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The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about November
15, 1996.

ALEX. BROWN & SONS RAGEN MACKENZIE

INCORPORATED INCORPORATED

THE DATE OF THIS PROSPECTUS IS NOVEMBER 12, 1996.

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[INSERT MAP]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."

<PAGE> 3

AVAILABLE INFORMATION

The Company is subject to the reporting and other informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Copies of such reports, proxy statements and other information can be obtained,
upon payment of prescribed fees, from the Commission at Judiciary Plaza, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, such reports,
proxy statements and other information can be inspected at the Commission's
facilities referred to above and at the Commission's Regional Offices at 7 World
Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661. The Common Stock
is included for quotation on the Nasdaq National Market, and such reports, proxy
statements and other information concerning the Company are available for
inspection and copying at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Company has
filed with the Commission a Registration Statement on Form S-2 (together with
any amendments thereto, the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act") with respect to the shares of Common
Stock to be offered pursuant to this Prospectus. This Prospectus does not
contain all the information set forth in the Registration Statement. The
Commission also maintains a site accessible to the public by computer on the
World Wide Web at http://www.sec.gov that contains reports, proxy statements and
other information regarding registrants that file electronically with the
Commission, including the Company.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, filed with the Commission by the Company under the
Exchange Act, are incorporated in and made a part of this Prospectus by
reference: (i) the Company's Annual Report on Form 10-K for the year ended
December 31, 1995; (ii) the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31 and June 30, 1996; and (iii) the Company's Current
Report on Form 8-K dated October 14, 1996.

Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be modified or superseded for the
purposes of this Prospectus to the extent that a statement contained herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not, except as so modified or superseded, constitute a part of
this Prospectus.

The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, on the written or oral request of any such
person, a copy of any or all of the documents referred to above which have been
or may be incorporated in this Prospectus by reference, other than exhibits to
such documents, unless such exhibits are specifically incorporated by reference
into such documents. Requests for such copies should be directed to: Kristen
Kopay, Marketing Officer, Columbia Banking System, Inc., 1102 Broadway Plaza,
Tacoma, Washington 98402, (206) 305-1900.

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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. Unless the context otherwise requires, references
in this Prospectus to the Company include its banking subsidiary, Columbia Bank.
This Prospectus contains certain forward-looking statements within the meaning
of the federal securities laws. Actual results and the timing of certain events
could differ materially from those projected in the forward-looking statements
due to a number of factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.

THE COMPANY

Columbia Banking System, Inc. (the "Company") is a registered bank holding
company whose wholly owned subsidiary, Columbia State Bank ("Columbia Bank"),
conducts a full-service commercial banking business. Headquartered in Tacoma,
Washington, the Company provides a full range of commercial banking services to
small and medium-sized businesses, professionals and other individuals through
15 branch offices located in the Tacoma metropolitan area and contiguous parts
of the Puget Sound region of Washington, as well as the Longview and Woodland
communities in southwestern Washington. At June 30, 1996, based on total assets
of $481.6 million, the Company was the largest publicly traded bank holding
company headquartered in Washington engaged primarily in commercial banking.

The Company was reorganized and additional management was added in 1993 in
order to take advantage of commercial banking business opportunities resulting
from increased consolidation of banks in the Company's principal market area,
primarily through acquisitions by out-of-state holding companies, and the
resulting dislocation of customers. Management believes the ongoing
consolidation among financial institutions in Washington has created significant
gaps in the ability of large banks operating in Washington to serve certain
customers, particularly the Company's target customer base of small and
medium-sized businesses, professionals and other individuals. The business
strategy of the Company is to provide its customers with the financial
sophistication and breadth of products of a regional bank while retaining the
appeal and service level of a community bank. Management believes that as a
result of the Company's strong commitment to highly personalized
relationship-oriented customer service, its varied products, its strategic
branch locations and the long-standing community presence of its managers,
lending officers and branch personnel, it is well positioned to attract new
customers and to increase its market share in lending and deposits.

Since the reorganization, the Company has experienced rapid growth and has
greatly expanded its commercial lending activities. The Company has grown from
four branch offices at January 1, 1993 to its present 15 branch offices and has
regulatory approval to open four additional branch offices in its market area.
Between January 1, 1993 and June 30, 1996, the Company increased its
consolidated assets from $158.6 million to $481.6 million, its loans from $120.8
million to $401.6 million and its deposits from $118.0 million to $402.9
million. While accomplishing this expansion, the Company's asset quality has
improved. At June 30, 1996, the Company's nonperforming assets constituted 0.15%
of total assets, as compared to 0.89%, 1.17%, and 2.13% at December 31, 1995,
1994 and 1993, respectively. Although the Company incurred anticipated losses in
the four quarters following its 1993 reorganization, the Company has been
profitable in each of the last eight quarters ending June 30, 1996.

The Company's goal is to create, over the next several years, a
well-capitalized, customer focused, Pacific Northwest commercial banking
institution with a significant presence in selected markets and total assets in
excess of $1.0 billion. The Company intends to effect this growth strategy
through a combination of growth at existing branch offices, new branch openings
(usually following the hiring of an experienced branch manager and/or lending
officer with strong community ties and banking relationships) and acquisitions.
In particular, the Company anticipates continued expansion in Pierce County and
expansion into additional parts of neighboring King County and Thurston

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County (the location of the state capitol, Olympia). In order to fund its
commercial and consumer lending activities and to allow for increased contact
with customers, the Company is establishing a branch system catering primarily
to retail depositors, supplemented by business banking customer deposits and
other borrowings. The Company believes this mix of funding sources will enable
it to expand its commercial lending activities rapidly while attracting a stable
core deposit base.

In order to support its strategy of growth, without compromising its
personalized banking approach or its commitment to asset quality, the Company
has made significant investments in experienced branch, lending and
administrative personnel and has incurred significant costs related to its
branch expansion. Although the Company's expense ratios have improved since
1993, management anticipates that the ratios will remain relatively high by
industry standards for the foreseeable future due to the Company's aggressive
growth strategy and emphasis on convenience and personal service.

The Company utilizes the extensive banking experience of the senior
executives and other key personnel of the Company to pursue its personal
service-oriented approach to banking. The Company's principal executives are
A.G. Espe, its Chairman, and W.W. Philip, its President. Both executives have
extensive experience in managing larger and medium-sized commercial banking
organizations in the Northwest and were instrumental in executing internal and
acquisition-based growth strategies for Alaska Pacific Bancorporation, Inc. and
Key Pacific Bancorp (in the case of Mr. Espe) and Puget Sound Bancorp (in the
case of Mr. Philip). Mr. Espe has over 30 years of experience in the commercial
banking business. During his tenure at Key Pacific Bancorp, Mr. Espe was
responsible for numerous mergers and acquisitions in several western states,
including Washington, totaling more than $4 billion in total assets. Prior to
1985, Mr. Espe founded and managed Alaska Pacific Bancorporation, Inc., a bank
holding company with total assets in excess of $600 million at the time it was
acquired by KeyCorp. Under the leadership of Mr. Philip, Puget Sound Bancorp had
the largest deposit market share of any financial institution in Pierce County
prior to its acquisition in 1993. Mr. Philip has over 40 years of experience in
the commercial banking business and managed the growth of Puget Sound Bancorp
from approximately $200 million in 1971 when he became President to
approximately $4.9 billion prior to its acquisition in January 1993. In
addition, all of the Company's senior lending officers and branch managers had
significant experience with other Washington banking organizations prior to
joining the Company.

The economy of the Company's principal market area, while primarily
dependent upon aerospace, foreign trade and natural resources, including
agriculture and timber, has become more diversified over the past decade as a
result of the success of software companies such as Microsoft and the
establishment of numerous research and biotechnology firms. The Washington
economy and that of the Puget Sound region generally have experienced moderate
growth and stability in recent years. Pierce County is projected to have the
strongest economic performance in the Puget Sound region through 1999 according
to the Puget Sound Economic Forecaster, a regional publication providing
economic forecasts and commentary. According to the same publication, the
greater Puget Sound economy is projected to expand at nearly twice the national
rate for the years 1997 through 1999.

The Company's principal executive offices are located at 1102 Broadway
Plaza, Tacoma, Washington, 98402. Its telephone number is (206) 305-1900.

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THE OFFERING

<TABLE>
<S> <C>
Common Stock offered hereby............... 1,285,000 shares(1)
Common Stock to be outstanding after the
offering................................ 4,995,077 shares(1)(2)
Use of proceeds........................... Approximately $10.0 million of the net proceeds
will be contributed to Columbia Bank, primarily
to fund additional loan growth. The remainder
will be used to repay $3.0 million borrowed under
a line of credit and for general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market Symbol............. COLB
</TABLE>

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(1) An additional 192,750 shares may be sold pursuant to an over-allotment
option granted by the Company to the Underwriters. See "Underwriting."

(2) Excludes 293,393 shares of Common Stock (333,393 shares of Common Stock,
assuming shareholder approval of additional shares to be available pursuant
to the Company's Employee Stock Option Plan and certain other amendments to
that plan) issuable upon exercise of outstanding options as of September 30,
1996. See "Management -- Option Grants/Awards."

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Net interest income.............. $9,495 $7,925 $16,561 $11,580 $ 6,424 $4,660 $3,138
Provision for loan losses........ 760 600 1,250 1,000 502 170 80
Noninterest income............... 2,473 1,833 3,991 2,996 2,043 1,021 1,131
Noninterest expense.............. 9,368 8,111 16,547 14,036 10,656 4,488 3,810
Provision for income taxes(1).... -- -- -- -- -- -- 14
Net income (loss)(1)............. 1,840 1,047 2,755 (614) (2,439) 1,023 365
Net income (loss) per
share(1)(2).................... $ 0.52 $ 0.30 $ 0.79 $ (0.18) $ (1.06) $ 0.89 $ 0.44
PERFORMANCE RATIOS:
Net interest margin(3)(4)........ 4.55% 4.96% 4.78% 4.54% 3.69% 3.79% 3.25%
Efficiency ratio(5).............. 78.30 83.10 80.50 96.30 125.90 79.00 89.20
Return on average assets(4)...... 0.82 0.61 0.74 (0.22) (1.28) 0.74 0.36
Return on average equity(4)...... 11.36 7.29 9.25 (2.12) (12.76) 11.16 6.48
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets..................... $481,612 $383,305 $425,206 $319,072 $235,944 $158,694 $120,800
Loans, net of unearned fees(6)... 401,554 323,447 353,093 268,996 181,016 120,797 92,383
Deposits......................... 402,914 313,708 361,875 268,692 165,339 118,014 94,379
Federal Home Loan Bank
advances....................... 37,000 34,000 25,000 17,000 32,000 18,000 15,000
Shareholders' equity............. 33,783 30,214 31,967 28,861 29,801 11,641 6,001
Book value per share(2).......... $ 9.70 $ 8.82 $ 9.30 $ 8.44 $ 8.73 $ 8.22 $ 7.73
Equity to assets ratio........... 7.01% 7.88% 7.52% 9.05% 12.63% 7.34% 4.97%
ASSET QUALITY RATIOS:
Nonperforming loans to loans..... 0.19% 0.17% 0.13% 0.18% 0.95% 0.62% 0.91%
Allowance for loan losses to
loans.......................... 1.10 0.98 1.06 1.01 1.10 1.25 1.54
Allowance for loan losses to
nonperforming loans............ 592.08 592.34 807.76 546.57 115.48 202.77 168.96
Nonperforming assets to total
assets......................... 0.15 1.00 0.89 1.17 2.13 2.34 2.79
OTHER DATA:
Number of banking offices........ 14 10 13 9 8 4 4
Number of full-time equivalent
employees...................... 218 181 201 161 169 109 n/a
</TABLE>

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(1) The Company continues to benefit from the utilization of its net operating
loss carryforwards for federal income tax purposes. Therefore, the Company
had no federal income tax provision for the periods presented except for
fiscal year 1991. Had earnings been taxable for the six months ended June
30, 1996, net income would have been $1.2 million or $0.34 per share.
Management anticipates that the Company will record a provision for income
taxes during 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations," "Taxation"
and Notes to Consolidated Financial Statements.

(2) On April 24, 1996, the Company announced a 5% stock dividend to shareholders
of record on May 8, 1996, which was paid on May 22, 1996 through the
issuance of 164,051 common shares to shareholders. Per share data have been
adjusted retroactively for all periods presented.

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(3) Net interest margin is net interest income divided by average
interest-earning assets.

(4) Six-month data presented on an annualized basis.

(5) The efficiency ratio is recurring noninterest expense divided by the sum of
net interest income and noninterest income excluding nonrecurring items.

(6) Excludes loans held for sale.

Except as otherwise specified, all information in this Prospectus assumes
no exercise of the Underwriters' over-allotment option. See "Underwriting." All
information with respect to the Common Stock and per share amounts contained in
this Prospectus have been adjusted, unless otherwise specified, to give effect
to a 5% stock dividend paid on May 22, 1996.

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RISK FACTORS

In addition to other information in this Prospectus, the following factors
should be considered carefully in evaluating an investment in the shares of
Common Stock offered by this Prospectus.

Aggressive Growth Strategy. The Company intends to continue pursuing the
aggressive growth strategy which it began in 1993, both through expanding its
existing operations and through acquisitions. Its growth strategy is
significantly dependent upon the continued expansion of banking offices
throughout the Company's market area and the Company's ability to generate an
increasing volume of loans and deposits at acceptable risk levels and upon
acceptable terms. Since 1993, the Company has expanded, and continues to expand,
its loan portfolio at a rapid pace, with a heavy emphasis on commercial lending.
The loan-to-deposit ratio at June 30, 1996 was approximately 99.7%. Although the
Company has not incurred significant credit losses in recent periods, there can
be no assurance that the Company will not incur significant credit losses in the
future. Moreover, there can be no assurance that the Company will be successful
in expanding its asset base to a targeted size, managing the costs and
implementation risks associated with its growth strategy, identifying and
acquiring attractive potential acquisition candidates on terms favorable to the
Company, integrating any acquired institutions or branches or preventing deposit
erosion at acquired institutions or branches. Acquisitions and branching by the
Company will also be subject to regulatory approvals and there can be no
assurance that the Company will succeed in securing such approvals. The
Company's ability to pursue its growth strategy also may be adversely affected
by general economic conditions. See "Business -- General" and "-- Competition."

Dependence on Key Personnel. The Company is dependent on the services of
A.G. Espe, its current Chairman of the Board and Chief Executive Officer, and
W.W. Philip, its President and Chief Operating Officer and President and Chief
Executive Officer of Columbia Bank. The loss of the services of either Mr. Espe
or Mr. Philip, or of certain other key branch and lending personnel, could
adversely affect the Company. The Company recently amended its employment
agreement with Mr. Espe to extend its term to December 31, 2001. While the
Company also recently amended its employment agreement with Mr. Philip to extend
its term to December 31, 1998, Mr. Philip has indicated his intention to retire
at that time. See "Management -- Employment and Change of Control Agreements."

Changing Nature of Banking Business. The banking industry generally has
seen a trend toward automation of delivery of banking services, a reduction in
the number of full-service branch offices and a de-emphasis on personal service.
This trend appears to be the result of efforts by banks to reduce costs and
increase efficiency. While the Company seeks to keep pace with industry trends
and technological innovations, its strategy is based on the belief that customer
demand for personal contact and strategically placed branch offices will
continue for the foreseeable future. Thus, Columbia Bank is continuing to expand
its branch network and the availability to customers of well-trained and highly
motivated personnel at a time when many banks are consolidating their branch
networks and automating customer responses. There can be no assurance that this
strategy will be successful or that technological advances by its competitors
will not result in the loss of customer relationships. As a result of this
strategy, Columbia Bank's cost for providing banking services may generally be
higher than that of many of its competitors for the foreseeable future.

Overhead Expense. Competition in the banking industry has led many
commercial banking companies to focus on expense reduction as a method of
increasing shareholder returns. Due to the Company's aggressive growth strategy
and emphasis on personal service, the Company's expense ratios are higher than
those of most similarly sized commercial banks. At June 30, 1996, the Company's
efficiency ratio was 78.3%. While the Company anticipates that its efficiency
ratio will improve gradually as overhead expenses are allocated over a larger
asset base, there can be no assurance that it will reach the levels of certain
of the Company's more efficient commercial banking competitors, many of whom are
following strategies different from those of the Company. See

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<PAGE> 10

"-- Changing Nature of Banking Business." Failure by the Company to improve its
efficiency ratio over time could adversely affect the value of the Common Stock.

Allowance for Loan Losses. The Company's allowance for loan losses is
maintained at a level considered adequate by management to provide for
anticipated loan losses. The amount of future losses is subject to changes in
economic, operating and other conditions that may be beyond the Company's
control and such losses may exceed current estimates. At June 30, 1996, the
Company had total nonperforming loans of $745,000 which constituted 0.19% of
total loans at that date. At that same date, the Company's allowance for loan
losses was $4.4 million, or 1.10% of total loans and 592.08% of total
nonperforming loans. There can be no assurance, however, that such allowance
will be adequate to cover actual losses. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations."

Competition. The Company's strategy involves the significant expansion of
Columbia Bank throughout the Tacoma metropolitan area and contiguous parts of
the Puget Sound region of Washington. During the past several years, substantial
consolidation among financial institutions in Washington has occurred. Due in
part to recent federal legislation concerning interstate banking, the Company
anticipates a continuation of the consolidation trend in Washington. Legislation
has recently been passed by the Washington legislature (effective June 1996)
that allows, subject to certain conditions, mergers or other combinations,
relocations of a bank's main office and branching across state lines in advance
of the June 1, 1997 date established by federal law (see "Supervision and
Regulation -- Other Regulatory Developments"). Many other financial
institutions, most of which have greater resources than the Company, compete
with the Company for banking business in the Company's market area. Among the
advantages of some of these institutions are their ability to make larger loans,
finance extensive advertising campaigns, access international money markets and
allocate their investment assets to regions of highest yield and demand. The
Company does not have a significant market share of the deposit-taking or
lending activities in the areas in which it conducts operations. Although the
Company has been able to compete effectively in its market areas to date, there
can be no assurance that it will be able to continue to do so in the future. See
"Business -- Competition."

Impact of Interest Rates. The results of operations for commercial banks,
including Columbia Bank, may be materially and adversely affected by changes in
prevailing economic conditions, including changes in interest rates and the
monetary and fiscal policies of the federal government. Although the current
interest rate environment is favorable for many financial institutions,
including the Company, such an environment is unlikely to continue indefinitely.
The Company's profitability, like that of many financial institutions, is
dependent to a large extent upon net interest income, which is the difference
between interest income on interest-earning assets, such as loans and
investments, and interest expense on interest-bearing liabilities, such as
deposits and borrowings. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Conversely, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net interest income. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Asset/ Liability Management."

Geographic Concentration. Substantially all of the Company's lending
activities are to customers in the Puget Sound region of Washington.
Consequently, the Company's growth and profitability are dependent upon economic
conditions in the region. Unfavorable changes in economic conditions affecting
the region, such as in the aerospace, natural resources or software industries,
or a significant decline in foreign trade or in the large military base presence
in the area may have an adverse impact on operations of the Company.

Conflicts of Interest. In addition to his position with the Company, Mr.
Espe is the Chairman of the Board of Northrim Bank, a publicly traded bank based
in Anchorage, Alaska, with total assets of

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<PAGE> 11

$202.4 million at September 30, 1996. At September 30, 1996, Mr. Espe
beneficially owned 10.5% of Northrim Bank's common stock. While Mr. Espe
currently devotes, and intends to continue to devote, a majority of his time to
the Company's matters, there can be no assurance that this will continue to be
the case. Mr. Espe's employment agreement with the Company prohibits him from
competing with the Company in Washington and Oregon for a period of two years
following his voluntary termination of the agreement without "good reason" (as
defined in the agreement). See "Management -- Employment and Change of Control
Agreements."

Shares Eligible for Future Sale. The future sale of a substantial number
of shares of Common Stock by existing shareholders, or the sale of shares of
Common Stock by shareholders purchasing shares of Common Stock in this offering,
could have a material adverse effect on the market price of the Common Stock.
The Company, its executive officers and directors and any affiliates thereof
have agreed that for a period of 120 days after the date of this Prospectus they
will not sell or otherwise dispose of any shares of Common Stock without the
prior written consent of the Underwriters. See "Underwriting" and "Shares
Eligible for Future Sale."

Government Regulation and Recent Legislation. The Company is subject to
extensive federal and Washington state legislation, regulation and supervision.
These laws and regulations are primarily intended to protect depositors and the
deposit insurance fund, not shareholders of the Company. The Company is subject
to regulation by the Board of Governors of the Federal Reserve System. Columbia
Bank, as a state-chartered bank, is subject to supervision by the Federal
Deposit Insurance Corporation (the "FDIC") and the Washington Department of
Financial Institutions, Division of Banks. Recently enacted, proposed and future
legislation and regulations have had, will continue to have, or may have a
material effect on the business, operations and prospects of the Company. Some
of the legislative and regulatory changes may increase the Company's cost of
doing business and assist competitors of the Company. The Company is unable to
predict the nature or extent of the effects on its business and earnings that
any fiscal or monetary policies, or new federal or state legislation or
regulations, may have in the future. See "Recent Developments" and "Supervision
and Regulation."

Anti-Takeover Provisions. Certain provisions contained in the Company's
Articles of Incorporation (the "Articles") may deter potential acquirers from
attempting a takeover of the Company. The Articles require that any Business
Combination (as defined in the Articles) be approved by the affirmative vote of
not less than 66 2/3% of the total shares attributable to persons other than a
Control Person (as defined in the Articles). This "supermajority" approval is
not required if the Company's Board of Directors has approved the transaction or
if certain other conditions concerning nondiscrimination among shareholders and
receipt of fair value are satisfied. The Articles also include a provision that
requires the Company's Board of Directors to consider certain non-monetary
factors in evaluating any acquisition bid. Finally, the Articles provide, among
other things, that the Company may issue up to 2,000,000 shares of preferred
stock, none of which shares are currently issued and outstanding, without prior
shareholder approval, in one or more series, with such relative rights and
preferences as the Board of Directors may determine. The issuance of preferred
stock under certain circumstances could have the effect of delaying or
preventing a change in control of the Company. These provisions, and certain
provisions contained in Chapter 19 of the Washington Business Corporation Act,
Revised Code of Washington Title 23B.19, which prohibit certain significant
business transactions if not accomplished in accordance with the statute,
collectively and individually, may discourage transactions such as mergers or
tender offers on terms which certain of the Company's shareholders may consider
beneficial. As a result, holders of the Common Stock may potentially be deprived
of an opportunity to sell their shares at a premium over market price.

10
<PAGE> 12

RECENT DEVELOPMENTS

EFFECT OF RECENT LEGISLATION

Columbia Bank's deposits are insured by the FDIC through the Bank Insurance
Fund (the "BIF") and through the Savings Association Insurance Fund (the
"SAIF"). Approximately 39% of the Company's deposits are deemed to be
SAIF-insured under an allocation formula that applies because certain deposits
were previously acquired from a savings bank in a so-called "Oakar" transaction.
See "Business -- General." The FDIC's current annual assessment rate for
deposits ranges from 0.0% to 0.27% of insured deposits for the BIF and 0.23% to
0.31% of insured deposits for the SAIF. Legislation was recently enacted to
resolve the difference in rates between the two funds. Pursuant to this
legislation, the FDIC has proposed to lower SAIF assessment rates from their
current rates to a range of 0.04% to 0.31% and then through application of an
adjustment factor to further reduce SAIF assessment rates to an effective range
of 0.0% to 0.27%. The FDIC has also proposed to maintain an assessment rate of
between 0.0% and 0.27% of covered deposits for BIF members. These rates would
become effective January 1, 1997. Further, the FDIC has proposed that such rate
schedule be effective for certain institutions, such as Columbia Bank, for the
period of October 1, 1996 until December 31, 1996. Any overpayment of fourth
quarter assessments, estimated at 0.0575% for certain banks, such as Columbia
Bank, will be refunded or credited with interest. The legislation also requires
a special assessment on SAIF-insured deposits held by the institution at March
31, 1995, with a discount of 20% on the special assessment and subsequent
assessments for Oakar institutions, such as Columbia Bank, which meet certain
tests. The FDIC has estimated that the special assessment rate will be
approximately 0.657% of covered deposits. Moreover, the legislation requires
assessments on both SAIF and BIF members in order to service bonds issued in
connection with the government resolution of the savings and loan crisis. The
FDIC also has estimated that for the next three years beginning on January 1,
1997 through December 31, 1999, an annual assessment of approximately 0.064% of
covered deposits and 0.013% of covered deposits will be assessed upon SAIF- and
BIF-insured deposits, respectively, and from January 1, 2000 through December
31, 2017, the assessment rate will be 0.024% of covered deposits for all insured
institutions. If the deposit insurance funds are merged on January 1, 1999
pursuant to the legislation, then the uniform assessment rate to service the
bonds will apply from that date forward. Based on the FDIC estimates as to
assessment rates in future periods, management anticipates that its assessment
rate for deposits deemed to be SAIF-insured will be 0.0% during the fourth
quarter of 1996 and 0.064% beginning in 1997. Management also anticipates that
its assessment rate for BIF-insured deposits will be 0.0% during the fourth
quarter of 1996 and 0.013% beginning in 1997.

The discount of 20% on the one-time special assessment and subsequent SAIF
assessments is applicable to certain commercial banking institutions, such as
Columbia Bank, that had SAIF deposits of less than 50% of total domestic
deposits as of June 30, 1995. At March 31, 1995, the date upon which the SAIF
deposit base is calculated for the purpose of the special assessment, Columbia
Bank was deemed to have SAIF deposits of $116.5 million. Management has
calculated the effect of the one-time special assessment to be $612,000. That
amount was charged to earnings during the third quarter of 1996, substantially
reducing third quarter earnings. The current charge to earnings is expected to
be recovered within approximately three years through reduced assessment rates.

At September 30, 1996, approximately $156.0 million of Columbia Bank's
deposits were deemed to be SAIF-insured under the allocation formula. The actual
deposits at that date remaining from the Oakar transaction were approximately
$23.0 million.

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996

The following table sets forth unaudited summary financial information for
the Company for the three and nine months ended September 30, 1996 and 1995 and
reflects the effect of the one-time special assessment by the FDIC. This
information should be read in conjunction with the consoli-

11
<PAGE> 13

dated financial statements of the Company and notes thereto appearing elsewhere
in this Prospectus and with Management's Discussion and Analysis of Financial
Condition and Results of Operations.

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS
ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1996 1995 1996 1995
------ ------ ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
OPERATIONS DATA:
Net interest income............................................... $5,261 $4,281 $14,756 $12,206
Provision for loan losses......................................... 330 320 1,090 920
Noninterest income................................................ 1,390 1,078 3,863 2,911
Noninterest expense............................................... 5,226 4,267 14,594 12,378
SAIF special assessment........................................... 612 -- 612 --
Provision for income taxes(1)..................................... -- -- -- --
Net income(1)..................................................... 483 772 2,323 1,819
Net income (excluding SAIF special assessment)(1)................. 1,095 772 2,935 1,819
Net income per share(1)(2)........................................ $ 0.13 $ 0.22 $ 0.64 $ 0.52
Net income per share (excluding SAIF special assessment)(1)(2).... $ 0.30 $ 0.22 $ 0.81 $ 0.52
PERFORMANCE RATIOS:
Net interest margin(3)(4)......................................... 4.40% 4.71% 4.49% 4.87%
Efficiency ratio(5)............................................... 78.57 80.21 78.38 82.09
Return on average assets(4)....................................... 0.38 0.78 0.66 0.67
Return on average assets (excluding SAIF special assessment)(4)... 0.86 0.78 0.84 0.67
Return on average equity(4)....................................... 5.39 10.17 9.24 8.29
Return on average equity (excluding SAIF special assessment)(4)... 12.22 10.17 11.67 8.29
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.................................................. $530,854 $ 425,206
Loans, net of unearned fees(6)................................ 431,772 353,093
Deposits...................................................... 454,500 361,875
Federal Home Loan Bank advances............................... 32,000 25,000
Shareholders' equity.......................................... 36,876 31,967
Book value per share(2)....................................... $ 9.94 $ 9.30
Equity to assets ratio........................................ 6.95% 7.52%
ASSET QUALITY RATIOS:
Nonperforming loans to loans.................................. 0.35% 0.13%
Allowance for loan losses to loans............................ 1.01 1.06
Allowance for loan losses to nonperforming loans.............. 284.00 807.76
Nonperforming assets to total assets.......................... 0.29 0.89
OTHER DATA:
Number of banking offices..................................... 15 13
Number of full-time equivalent employees...................... 238 201
</TABLE>

- ---------------

(1) The Company continues to benefit from the utilization of its net operating
loss carryforwards for federal income tax purposes. Therefore, the Company
had no federal income tax provision for the periods presented except for
fiscal year 1991. Had earnings been taxable for the nine months ended
September 30, 1996, net income would have been $1.5 million or $0.42 per
share. Management anticipates that the Company will record a provision for
income taxes during 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations,"
"Taxation" and Notes to Consolidated Financial Statements.

(3) Net interest margin is net interest income divided by average
interest-earning assets.

(4) Three-month and nine-month data presented on an annualized basis.

(5) The efficiency ratio is recurring noninterest expense divided by the sum of
net interest income and noninterest income excluding nonrecurring items.

(6) Excludes loans held for sale.

12
<PAGE> 14

Net Income. Net income for the three months ended September 30, 1996 was
$483,000, or $0.13 per share, compared to $772,000, or $0.22 per share, for the
same period in 1995, a decrease of 37.4% and 40.9% in net income and earnings
per share, respectively. The decrease was attributable to the $612,000 special
assessment on SAIF-insured deposits. Net income for the nine months ended
September 30, 1996 was $2.3 million, or $0.64 per share, compared to $1.8
million, or $0.52 per share, for the same period in 1995. Excluding the special
SAIF assessment, net income for the three months ended September 30, 1996
increased 41.8% to $1.1 million, or $0.30 per share, compared to $772,000, or
$0.22 per share, for the same period in the prior year. Net income for the nine
months ended September 30, 1996, excluding the special SAIF assessment,
increased 61.4% to $2.9 million, or $0.81 per share, from $1.8 million, or $0.52
per share, for the same period in 1995. The increase in net income was primarily
due to increased revenue resulting from continued loan and deposit growth.

Net Interest Income. Net interest income for the nine months ended
September 30, 1996 increased 20.9% to $14.8 million from $12.2 million for the
same period in 1995. The increase in net interest income for the first nine
months of 1996 was due to the overall growth of the Company. Total assets
increased 24.8% to $530.9 million at September 30, 1996 from $425.2 million at
December 31, 1995.

Net interest margin (net interest income divided by average
interest-earning assets) for the nine months ended September 30, 1996 decreased
to 4.49% from 4.87% for the same period in 1995. The decrease in net interest
margin was primarily due to lower yields obtained on loans as a result of a
planned change in loan mix from higher yielding commercial real estate loans to
high quality, but lower yielding, commercial loans and to increased competition
in the Company's market area. Also affecting net interest margin was a one-time
adjustment to the amortization of deferred loan origination fees in the three
months ended September 30, 1996, amounting to approximately $100,000.

Noninterest Income. Total noninterest income for the nine months ended
September 30, 1996 increased 32.7% to $3.9 million, compared to $2.9 million for
the same period in 1995.

Noninterest Expense. Excluding the special SAIF assessment, total
noninterest expense for the nine months ended September 30, 1996 increased 17.9%
to $14.6 million, compared to $12.4 million for the same period in 1995.

Nonperforming Assets. Nonperforming loans increased to $1.5 million at
September 30, 1996 from $464,000 at December 31, 1995 due principally to the
inclusion of loans which, though nonperforming, are secured by real estate. In
the fourth quarter of 1996, management anticipates charge-offs of those
nonperforming loans which are unsecured or undersecured, although the amount of
such charge-offs is not expected to be material. The balance of such loans are
expected to be paid or to return to performing status in the near future. The
allowance for loan losses at September 30, 1996 decreased to 1.01% from 1.06% of
loans at December 31, 1995 (excluding loans held for sale at each date) due to a
$273,000 increase in charge-offs compared with the first nine months of 1995 and
a $78.7 million, or 22.3%, increase in loans compared to year-end 1995. At
September 30, 1996, nonperforming loans were 0.35% of period-end loans and
nonperforming assets were 0.29% of period-end assets.

13
<PAGE> 15

USE OF PROCEEDS

The net proceeds (after deducting underwriting discounts, commissions and
estimated offering expenses) to the Company from the sale of the Common Stock
offered hereby are estimated to be $18,383,200 ($21,181,930 if the Underwriters'
over-allotment option is exercised in full) based on the offering price of
$15.50 per share.

The Company plans to contribute approximately $10.0 million of the net
proceeds to Columbia Bank primarily to fund additional loan growth. The
remainder will be used to repay $3.0 million borrowed under a line of credit and
for general corporate purposes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources."

PRICE RANGE OF COMMON STOCK

The Common Stock is quoted on the Nasdaq National Market under the symbol
COLB. The following table sets forth for the periods indicated the high and low
sale prices for the Common Stock as reported on the Nasdaq National Market:

<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1994
First quarter................................................... $ 12 $ 10
Second quarter.................................................. 11 1/2 10 1/4
Third quarter................................................... 11 10
Fourth quarter.................................................. 11 9
1995
First quarter................................................... $ 12 $9 1/8
Second quarter.................................................. 12 1/2 9 7/8
Third quarter................................................... 12 3/8 11 1/8
Fourth quarter.................................................. 12 3/4 11 1/4
1996
First quarter................................................... $14 3/4 $11 1/2
Second quarter.................................................. 16 1/2 13
Third quarter................................................... 14 14 1/4
Fourth quarter (through November 11, 1996)...................... 17 1/4 14 3/4
</TABLE>

On November 11, 1996, the last trading day prior to the date of this
Prospectus, the last reported sale price for the Common Stock on the Nasdaq
National Market was $16.00 per share. At September 30, 1996, there were 852
holders of record of the Common Stock.

DIVIDENDS

The Company does not currently pay cash dividends on its Common Stock and
does not intend to do so for the foreseeable future. It is not presently
anticipated that the Company will conduct significant operations independent of
Columbia Bank and therefore the Company does not expect to have any significant
source of income other than earnings on the net proceeds of the offering
retained by the Company and dividends from Columbia Bank, if any. Consequently,
the ability of the Company to pay dividends to its shareholders will be
dependent upon such retained proceeds and the earnings thereon, and upon the
ability of Columbia Bank to pay dividends to the Company.

Applicable federal and Washington state regulations restrict capital
distributions by institutions such as Columbia Bank, including dividends. Such
restrictions are tied to the institution's capital levels after giving effect to
such distributions. For the foreseeable future, it is the Company's intent to
retain earnings to support the growth of its business. See "Supervision and
Regulation -- The Company."

14
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company at June
30, 1996, and as adjusted to reflect the receipt of net proceeds from the sale
of 1,285,000 shares of Common Stock pursuant to this offering at the offering
price of $15.50 per share:

<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------
ACTUAL AS ADJUSTED
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Deposits................................................... $402,914 $402,914
Borrowings:
Federal Home Loan Bank advances.......................... 37,000 37,000
Other borrowings......................................... 2,300 2,300
Convertible subordinated notes(1)........................ 2,363 --
-------- -------------
Total deposits and borrowings......................... $444,577 $442,214
-------- -------------
-------- -------------
Shareholders' equity:
Preferred stock (no par value); 2,000,000 shares
authorized; none outstanding.......................... -- --
Common stock (no par value); 10,000,000 shares
authorized; 3,482,268 shares issued and outstanding;
4,991,011 shares as adjusted(1)(2).................... $ 33,354 $ 54,100
Retained earnings........................................ 957 957
Unrealized losses on securities available for sale....... (528) (528)
-------- -------------
Total shareholders' equity............................ $ 33,783 $ 54,529
-------- -------------
-------- -------------
</TABLE>

- ---------------

(1) On June 3, 1996, the Company gave notice of its intent to redeem all of its
issued and outstanding 7.85% Convertible Subordinated Notes on August 1,
1996. Prior to August 1, 1996, all of the Notes were converted into 223,743
shares of Common Stock. The issuance of such additional shares is reflected
in the as adjusted "Shareholders' Equity."
(2) Does not include 293,393 shares issuable at prices ranging from $3.81 to
$15.25 per share upon exercise of outstanding stock options. Also does not
include a warrant outstanding to Dain Bosworth Incorporated, lead
underwriter of a prior issue of securities by the Company, to purchase
18,716 shares at $10.14 per share. Between June 30, 1996 and September 30,
1996, 4,066 shares were issued pursuant to the exercise of stock options.

15
<PAGE> 17

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following selected consolidated financial information for the five
years ended December 31, 1995 has been derived in part from the audited
consolidated financial statements of the Company. Consolidated balance sheets at
December 31, 1995 and 1994 and the related consolidated statements of operations
and of cash flows for the three years ended December 31, 1995 and notes thereto
appearing elsewhere in this Prospectus have been audited by Price Waterhouse,
LLP, independent accountants. The summary financial data for the six months
ended June 30, 1996 and 1995 is derived from unaudited consolidated financial
statements and includes, in the opinion of management, all adjustments including
normal recurring accruals necessary to present fairly the data for such periods.
Operating results for the six months ended June 30, 1996 are not necessarily
indicative of the results that may be expected for any other interim period or
the entire year ending December 31, 1996.

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ ---------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Total interest income..................... $18,097 $14,717 $31,720 $20,656 $13,955 $11,583 $ 9,772
Total interest expense.................... 8,602 6,792 15,159 9,076 7,531 6,923 6,634
------- ------- ------- ------- ------- ------- -------
Net interest income..................... 9,495 7,925 16,561 11,580 6,424 4,660 3,138
Provision for loan losses................. 760 600 1,250 1,000 502 170 80
------- ------- ------- ------- ------- ------- -------
Net interest income after provision for
loan losses........................... 8,735 7,325 15,311 10,580 5,922 4,490 3,058
Service charges and other fees............ 1,148 905 1,895 1,242 556 417 432
Other noninterest income.................. 1,325 928 2,096 1,754 1,487 604 699
------- ------- ------- ------- ------- ------- -------
Total noninterest income................ 2,473 1,833 3,991 2,996 2,043 1,021 1,131
Total noninterest expense............... 9,368 8,111 16,547 14,036 10,656 4,488 3,810
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes......... 1,840 1,047 2,755 (460) (2,691) 1,023 379
Provision for income taxes(1)............. -- -- -- -- -- -- 14
------- ------- ------- ------- ------- ------- -------
Income (loss) before extraordinary item... 1,840 1,047 2,755 (460) (2,691) 1,023 365
Extraordinary loss on extinguishment of
debt, net............................... -- -- -- (154) -- -- --
Cumulative effect of accounting change.... -- -- -- -- 252 -- --
------- ------- ------- ------- ------- ------- -------
Net income (loss)(1)...................... $ 1,840 $ 1,047 $ 2,755 $ (614) $(2,439) $ 1,023 $ 365
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
Net income (loss) per share(1)(2)......... $ 0.52 $ 0.30 $ 0.79 $ (0.18) $ (1.06) $ 0.89 $ 0.44
Average common and common equivalent
shares outstanding (in thousands)(2).... 3,566 3,484 3,496 3,481 2,301 1,155 824
PERFORMANCE RATIOS:
Net interest margin(3)(4)................. 4.55% 4.96% 4.78% 4.54% 3.69% 3.79% 3.25%
Efficiency ratio(5)....................... 78.30 83.10 80.50 96.30 125.90 79.00 89.20
Return on average assets(4)............... 0.82 0.61 0.74 (0.22) (1.28) 0.74 0.36
Return on average equity(4)............... 11.36 7.29 9.25 (2.12) (12.76) 11.16 6.48
</TABLE>

16
<PAGE> 18

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................ $481,612 $383,305 $425,206 $319,072 $235,944 $158,694 $120,800
Loans, net of unearned fees(6).......... 401,554 323,447 353,093 268,996 181,016 120,797 92,383
Real estate owned....................... -- 3,296 3,304 3,227 3,305 2,959 2,523
Deposits................................ 402,914 313,708 361,875 268,692 165,339 118,014 94,379
Federal Home Loan Bank advances......... 37,000 34,000 25,000 17,000 32,000 18,000 15,000
Shareholders' equity.................... 33,783 30,214 31,967 28,861 29,801 11,641 6,001
Book value per share(2)................. $ 9.70 $ 8.82 $ 9.30 $ 8.44 $ 8.73 $ 8.22 $ 7.73
Equity to assets ratio.................. 7.01% 7.88% 7.52% 9.05% 12.63% 7.34% 4.97%
ASSET QUALITY RATIOS:
Nonperforming loans to loans............ 0.19% 0.17% 0.13% 0.18% 0.95% 0.62% 0.91%
Allowance for loan losses to loans...... 1.10 0.98 1.06 1.01 1.10 1.25 1.54
Allowance for loan losses to
nonperforming loans................... 592.08 592.34 807.76 546.57 115.48 202.77 168.96
Nonperforming assets to total assets.... 0.15 1.00 0.89 1.17 2.13 2.34 2.79
CAPITAL RATIOS(7):
Tier 1 risk-based capital............... 8.58% 9.57% 9.10% 11.34% 17.98% 10.18% n/a
Total risk-based capital................ 10.30 11.45 10.95 13.48 22.77 16.08 n/a
Leverage ratio.......................... 7.30 8.25 7.72 9.35 13.27 8.18 n/a
OTHER DATA:
Number of banking offices............... 14 10 13 9 8 4 4
Number of full-time equivalent
employees............................. 218 181 201 161 169 109 n/a
</TABLE>

- ---------------
(1) The Company continues to benefit from the utilization of its net operating
loss carryforwards for federal income tax purposes. Therefore, the Company
had no federal income tax provision for the periods presented except for
fiscal year 1991. Had earnings been taxable for the six months ended June
30, 1996, net income would have been $1.2 million, or $0.34 per share.
Management anticipates that the Company will record a provision for income
taxes during 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations," "Taxation"
and Notes to Consolidated Financial Statements.

(2) On April 24, 1996, the Company announced a 5% stock dividend to shareholders
of record on May 8, 1996, which was paid on May 22, 1996 through the
issuance of 164,051 common shares to shareholders. Share data have been
adjusted retroactively for all periods presented.

(3) Net interest margin is net interest income divided by average
interest-earning assets.

(4) Six-month data presented on an annualized basis.

(5) The efficiency ratio is recurring noninterest expense divided by the sum of
net interest income and noninterest income excluding nonrecurring items.

(6) Excludes loans held for sale.

(7) Capital ratios are for the Company. At June 30, 1996, Columbia Bank exceeded
regulatory capital requirements and qualified as "well-capitalized." See
"Supervision and Regulation -- Banking Subsidiary." Capital ratios in effect
as of December 31, 1991 are not comparable to the ratios as calculated in
this table. However, at December 31, 1991, the Company was in compliance
with applicable regulatory capital requirements.

17
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto appearing
elsewhere in this Prospectus. The data presented for the six-month periods ended
June 30, 1996 and June 30, 1995 are derived from unaudited consolidated interim
financial statements of the Company and include, in the opinion of management,
all adjustments necessary to present fairly the data for such periods.

OVERVIEW

The Company was substantially reorganized and raised approximately $17.2
million in net proceeds from a public offering of Common Stock in 1993 in order
to take advantage of perceived opportunities resulting from the consolidation of
banks operating in the Puget Sound region. Since that time, the Company has
experienced rapid asset growth, with assets increasing from $158.6 million at
January 1, 1993 to $481.6 million at June 30, 1996. In connection with its 1993
reorganization and subsequent rapid expansion, the Company incurred anticipated
net losses of $2.4 million in 1993 and $614,000 in 1994. However, the Company
achieved a small profit for the quarter ended September 30, 1994 and has been
profitable each quarter thereafter through June 30, 1996.

Set forth below is certain unaudited quarterly financial data for the
Company for the eight quarters ended June 30, 1996. Quarterly performance for
the quarter ending September 30, 1996 was significantly affected by a one-time
FDIC special assessment of $612,000 on Columbia Bank, which has certain deposits
insured by the SAIF. See "Recent Developments."

<TABLE>
<CAPTION>
1996 QUARTER 1994 QUARTER ENDED
ENDED 1995 QUARTER ENDED
---------------- ------------------------------------- -------------------
JUN 30 MAR 31 DEC 31 SEP 30 JUN 30 MAR 31 DEC 31(1) SEP 30
------ ------ ------ ------ ------ ------- --------- ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income........... $9,311 $8,786 $8,630 $8,373 $7,775 $6,942 $ 6,152 $5,497
Total interest expense.......... 4,306 4,296 4,275 4,092 3,699 3,093 2,619 2,405
----- ----- ----- ----- ----- ------- ------- -----
Net interest income........... 5,005 4,490 4,355 4,281 4,076 3,849 3,533 3,092
Provision for loan losses....... 430 330 330 320 300 300 260 240
Noninterest income.............. 1,308 1,165 1,080 1,078 950 883 856 853
Noninterest expense............. 4,851 4,517 4,169 4,267 4,124 3,987 3,621 3,488
----- ----- ----- ----- ----- ------- ------- -----
Income before income tax...... 1,032 808 936 772 602 445 508 217
Provision for income tax........ -- -- -- -- -- -- -- --
Income (loss) from continuing
operations before
extraordinary item.......... 1,032 808 936 772 602 445 508 217
Extraordinary loss on
extinguishment of debt, net... -- -- -- -- -- -- -- (154 )
----- ----- ----- ----- ----- ------- ------- -----
Net income.................... $1,032 $ 808 $ 936 $ 772 $ 602 $ 445 $ 508 $ 63
----- ----- ----- ----- ----- ------- ------- -----
----- ----- ----- ----- ----- ------- ------- -----
Net income per share........ $0.29 $0.23 $0.27 $0.22 $0.17 $ 0.13 $ 0.14 $0.02
----- ----- ----- ----- ----- ------- ------- -----
----- ----- ----- ----- ----- ------- ------- -----
</TABLE>

- ---------------
(1) The Company recorded a net loss of $614,000 for the year ended December 31,
1994.

The results of operations of the Company are dependent to a large degree on
the Company's net interest income. The Company also generates noninterest income
through service charges and fees and income from mortgage banking operations.
The Company's operating expenses consist primarily of compensation and employee
benefit expense and occupancy expense. Like most financial institutions, the
Company's interest income and cost of funds are affected significantly by
general economic conditions, particularly changes in market interest rates, and
by government policies and the actions of regulatory authorities. See "Risk
Factors -- Impact of Interest Rates."

18
<PAGE> 20

NET INTEREST INCOME

Net interest income is the difference between interest income, principally
from loans and securities, and interest expense, principally on customer
deposits and borrowings. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to the
average dollar amounts of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the average
yield on interest-earning assets and the average cost of interest-bearing
liabilities. Net interest margin refers to net interest income divided by
average interest-earning assets and is influenced by the level and relative mix
of interest-earning assets and interest-bearing liabilities. During the six
months ended June 30, 1996 and the years ended December 31, 1995 and 1994,
average interest-earning assets were $419.0 million, $346.6 million and $254.9
million, respectively. During these same periods, average interest-bearing
liabilities were $359.2 million, $300.3 million and $222.6 million,
respectively, and net interest margins were 4.55%, 4.78% and 4.54%,
respectively.

The following table sets forth for the periods indicated information for
the Company with respect to average balances of assets and liabilities, as well
as the total dollar amounts of interest income from interest-earning assets and
interest expense on interest-bearing liabilities, resultant yields or costs, net
interest income, net interest spread, net interest margin and the ratio of
average interest-earning assets to average interest-bearing liabilities.
Nonaccrual loans have been included in the tables as loans carrying a zero
yield.

19
<PAGE> 21
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1996 1995 1994
------------------------------- ------------------------------- ---------------------
INTEREST INTEREST INTEREST
AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE AVERAGE EARNED/
BALANCE(1) PAID RATE(2) BALANCE(1) PAID RATE BALANCE(1) PAID
---------- -------- ------- ---------- -------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans:
Commercial...................... $121,526 $ 5,300 8.75 % $ 92,831 $ 8,986 9.68 % $ 63,541 $ 5,272
Real estate(3):
One- to four-family
residential................. 92,829 4,209 9.09 97,280 9,073 9.33 78,408 6,495
Five or more family
residential and commercial
properties.................. 118,414 5,443 9.22 90,135 8,411 9.33 57,952 5,324
Consumer........................ 45,512 1,991 8.77 37,793 3,568 9.44 22,335 1,899
-------- ------- ------ -------- ------- ------ -------- -------
Total loans................... 378,281 16,943 8.98 318,039 30,038 9.44 222,236 18,990
Securities....................... 28,329 826 5.85 23,266 1,368 5.88 24,045 1,332
Interest-earning deposits with
banks........................... 12,352 328 5.32 5,336 314 5.88 8,597 334
-------- ------- ------ -------- ------- ------ -------- -------
Total interest-earning
assets...................... 418,962 18,097 8.66 346,641 31,720 9.15 254,878 20,656
Noninterest-earning assets....... 29,271 28,007 24,384
-------- -------- --------
Total assets.................. $448,233 $374,648 $279,262
-------- -------- --------
-------- -------- --------
INTEREST-BEARING LIABILITIES:
Certificates of deposit.......... $171,410 $ 4,879 5.71 % $168,351 $ 9,565 5.68 % $122,198 $ 5,595
Savings accounts................. 21,554 301 2.80 24,547 669 2.73 33,938 895
Interest-bearing demand
deposits........................ 131,362 2,413 3.68 79,706 3,151 3.95 38,962 814
-------- ------- ------ -------- ------- ------ -------- -------
Total interest-bearing
deposits.................... 324,326 7,593 4.70 272,604 13,385 4.91 195,098 7,304
Federal Home Loan Bank
advances........................ 32,170 884 5.51 24,915 1,503 6.03 21,452 1,160
Other borrowings................. 2,736 125 9.15 2,744 271 9.88 6,017 612
-------- ------- ------ -------- ------- ------ -------- -------
Total interest-bearing
liabilities................. 359,232 8,602 4.80 300,263 15,159 5.05 222,567 9,076
Demand and other noninterest-
bearing deposits................ 53,673 42,167 26,238
Other noninterest-bearing
liabilities..................... 2,854 2,444 1,476
Shareholders' equity............. 32,474 29,774 28,981
-------- -------- --------
Total liabilities and
shareholders' equity........ $448,233 $374,648 $279,262
-------- -------- --------
-------- -------- --------
Net interest income.............. $ 9,495 $16,561 $11,580
------- ------- -------
------- ------- -------
Net interest spread.............. 3.86 % 4.10 %
------ ------
------ ------
Net interest margin.............. 4.55 % 4.78 %
------ ------
------ ------
Average interest-earning assets
to average interest-bearing
liabilities..................... 116.63 % 115.45 %
------ ------
------ ------

1993
-------------------------------
INTEREST
AVERAGE AVERAGE EARNED/ AVERAGE
RATE BALANCE(1) PAID RATE
------- ---------- -------- -------

<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans:
Commercial...................... 8.30 % $ 23,894 $ 1,690 7.07 %
Real estate(3):
One- to four-family
residential................. 8.28 73,076 6,221 8.51
Five or more family
residential and commercial
properties.................. 9.19 35,255 3,608 10.23
Consumer........................ 8.50 8,128 739 9.09
------- -------- ------- ------
Total loans................... 8.54 140,353 12,258 8.73
Securities....................... 5.54 20,940 1,335 6.38
Interest-earning deposits with
banks........................... 3.89 12,800 362 2.83
------- -------- ------- ------
Total interest-earning
assets...................... 8.10 174,093 13,955 8.02
Noninterest-earning assets....... 15,825
--------
Total assets.................. $189,918
--------
--------
INTEREST-BEARING LIABILITIES:
Certificates of deposit.......... 4.58 % $ 75,682 $ 3,459 4.57 %
Savings accounts................. 2.64 29,743 1,039 3.49
Interest-bearing demand
deposits........................ 2.09 18,090 369 2.04
------- -------- ------- ------
Total interest-bearing
deposits.................... 3.74 123,515 4,867 3.94
Federal Home Loan Bank
advances........................ 5.41 25,875 1,788 6.91
Other borrowings................. 10.17 9,868 876 8.88
------- -------- ------- ------
Total interest-bearing
liabilities................. 4.08 159,258 7,531 4.73
Demand and other noninterest-
bearing deposits................ 10,621
Other noninterest-bearing
liabilities..................... 923
Shareholders' equity............. 19,116
--------
Total liabilities and
shareholders' equity........ $189,918
--------
--------
Net interest income.............. $ 6,424
-------
-------
Net interest spread.............. 4.02 % 3.29 %
------ ------
------ ------
Net interest margin.............. 4.54 % 3.69 %
------ ------
------ ------
Average interest-earning assets
to average interest-bearing
liabilities..................... 114.52 % 109.32 %
------ ------
------ ------
</TABLE>

- ---------------
(1) Loans on a nonaccrual status have been included in the computation of
average balances.
(2) Six-month yields are presented on an annualized basis.
(3) Real estate average balances include real estate construction loans.

20
<PAGE> 22

The following table sets forth the amounts of the changes in the Company's
consolidated net interest income attributable to changes in volume and changes
in interest rates. Changes attributable to the combined effect of volume and
interest rates have been allocated proportionately to the changes due to volume
and the changes due to interest rates.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
VS.
SIX MONTHS ENDED JUNE 30, 1995
INCREASE (DECREASE) DUE TO
-------------------------------
VOLUME RATE TOTAL
------ ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest Income:
Loans:
Commercial............................................. $1,632 $(330) $1,302
Real estate(1):
One- to four-family residential...................... (234) (33) (267)
Five or more family residential
and commercial properties......................... 1,732 (148) 1,584
Consumer............................................... 443 (97) 346
------ ----- ------
Total loans....................................... 3,573 (608) 2,965
Securities................................................ 149 7 156
Interest-earning deposits with banks...................... 267 (8) 259
------ ----- ------
Total interest revenue............................ $3,989 ($609) $3,380
------ ----- ------
------ ----- ------
Interest Expense:
Certificates of deposit................................... $ 179 $ 218 $ 397
Savings accounts.......................................... (73) 19 (54)
Interest-bearing demand deposits.......................... 1,263 (3) 1,260
------ ----- ------
Total interest on deposits........................ 1,369 234 1,603
Federal Home Loan Bank advances........................... 268 (48) 220
Other borrowings.......................................... (2) (11) (13)
------ ----- ------
Total interest expense............................ $1,635 $ 175 $1,810
------ ----- ------
------ ----- ------
</TABLE>

21
<PAGE> 23

<TABLE>
<CAPTION>
1995 COMPARED TO 1994 1994 COMPARED TO 1993
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------- ---------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------ ------- ------ ----- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans:
Commercial......................... $2,728 $ 986 $ 3,714 $3,244 $ 338 $3,582
Real estate(1):
One- to four-family
residential................... 1,693 885 2,578 435 (161) 274
Five or more family residential
and commercial properties..... 3,002 85 3,087 2,040 (324) 1,716
Consumer........................... 1,439 230 1,669 1,205 (45) 1,160
----- ------ ------- ----- ----- ------
Total loans................... 8,862 2,186 11,048 6,924 (192) 6,732
Securities........................... (41 ) 76 35 (26 ) 23 (3)
Interest-earning deposits with
banks.............................. 56 (75) (19) 203 (231) (28)
----- ------ ------- ----- ----- ------
Total interest revenue........ $8,877 $2,187 $11,064 $7,101 ($400) $6,701
----- ------ ------- ----- ----- ------
----- ------ ------- ----- ----- ------
Interest Expense:
Certificates of deposit.............. $2,424 $1,546 $ 3,970 $2,130 $ 6 $2,136
Savings accounts..................... (257 ) 31 (226) 195 (339) (144)
Interest-bearing demand deposits..... 1,261 1,076 2,337 436 9 445
----- ------ ------- ----- ----- ------
Total interest on deposits.... 3,428 2,653 6,081 2,761 (324) 2,437
Federal Home Loan Bank advances...... 200 143 343 (276 ) (352) (628)
Other borrowings..................... (324 ) (17) (341) (421 ) 157 (264)
----- ------ ------- ----- ----- ------
Total interest expense........ $3,304 $2,779 $ 6,083 $2,064 ($519) $1,545
----- ------ ------- ----- ----- ------
----- ------ ------- ----- ----- ------
</TABLE>

- ---------------
(1) Real estate includes real estate construction loans.

RESULTS OF OPERATIONS

Six Months Ended June 30, 1996 and 1995

Net Income. Net income for the six months ended June 30, 1996 was $1.8
million, or $0.52 per share, compared to $1.0 million, or $0.30 per share, for
the same period in 1995. This represented an increase of 75.7% and 73.3% in net
income and earnings per share, respectively. Net income for the first half of
1996 was positively affected by an increase in net interest income.

The Company continued to benefit from the utilization of its net operating
loss carryforwards for federal income tax purposes. Therefore, the Company had
no federal income tax provision for the six months ended June 30, 1996. Had the
earnings been fully taxable, net income would have been $1.2 million. See
"Income Taxes."

The Company opened four new branch offices during 1995, three in Pierce
County and one in South King County. Construction began in the first quarter of
1996 on a permanent facility for the Gig Harbor branch. During the second
quarter a new Spanaway branch opened in a temporary facility. The Spanaway
branch office is the tenth branch to open since Columbia Bank's major Pierce
County expansion began in August 1993, and the Puyallup branch, which opened in
September 1996, is the eleventh branch to open since that time, bringing
Columbia Bank's total number of branches to 15. The Company also intends to
build a branch at Northwest Landing in Dupont, near the site of Intel
Corporation's new manufacturing facility. Additional expansion opportunities in
the near future include another Puyallup location, the Edgewood/Milton area, the
Tacoma Westside, Stadium and Lincoln business districts and a second Bellevue
branch. Establishment of new branch offices and relocation of existing temporary
branch offices can be expected to require significant capital investment in 1996
and beyond. New branch offices are often not profitable for the first year after
opening.

22
<PAGE> 24

Net Interest Income. Net interest income for the six months ended June 30,
1996 increased by $1.6 million, or 19.8%, as compared to the first six months of
1995. The increase in net interest income for the first six months of 1996 was
largely due to the overall growth of the Company. Net interest income in the
first half of 1996 was favorably affected by average interest-earning assets
increasing more rapidly than average interest-bearing liabilities, with the
difference funded by noninterest-bearing deposits and shareholders' equity.
Average interest-earning assets for the first six months of 1996 increased by
$96.6 million, compared with the same period in 1995, while average
interest-bearing liabilities increased by only $80.0 million.

For the first six months of 1996, net interest margin (net interest income
divided by average interest-earning assets) decreased to 4.55% in 1996 from
4.96% in 1995. The decrease in net interest margin was primarily the result of
reduced spreads on earning assets. While interest-earning assets grew during the
first six months of 1996, the average yield on interest-earning assets decreased
to 8.66%, from 9.21% in the same period of 1995. In comparison, the average cost
of interest-bearing liabilities decreased to 4.80% during the first six months
of 1996 from 4.90% in the same period in 1995. The decrease in net interest
margin and spread was primarily due to lower yields obtained on loans as a
result of a planned change in loan mix from higher yielding commercial real
estate loans to high quality, but lower yielding commercial loans and to
increased competition in the Company's market area.

Provision for Loan Losses. Net loan charge-offs amounted to $97,000 for
the first six months of 1996, compared with net loan charge-offs of $142,000 for
the same period of 1995. The Company's provision for loan losses during the
first six months of 1996 increased to $760,000, compared with $600,000 for the
first six months of 1995. The allowance for loan losses increased by $663,000 to
1.10% of loans (excluding loans held for sale) at June 30, 1996, as compared to
0.98% of loans (excluding loans held for sale) at June 30, 1995.

Management considers the allowance for loan losses at June 30, 1996 to be
adequate to cover anticipated loan losses based on management's assessment of
various factors affecting the loan portfolio, including the level of problem
loans, business conditions, estimated collateral values, loss experience and
credit concentrations.

Noninterest Income. Total noninterest income increased $640,000, or 34.9%,
for the first six months of 1996, compared with the same period in 1995.
Increases in noninterest income in the first half of 1996 were centered in
account service charges, bank card revenue, and mortgage banking income.

Noninterest Expense. Total noninterest expense increased $1.3 million, or
15.5%, in the first six months of 1996 compared with the same period in 1995.
The increase was primarily due to personnel and occupancy costs associated with
the Company's expansion as well as bank card, data processing and other expense.
Total noninterest expense was 78.3% of adjusted revenue (the sum of net interest
income plus noninterest income, less nonrecurring items) for the first six
months of 1996 as compared to 83.1% for the same period in 1995. The portion of
compensation expense related to loan originations is deferred and deducted from
interest income over the life of the related loans. In the third quarter of
1995, the Company modified its estimates of loan origination costs to be
deferred, which resulted in increased deferral of compensation expense. The
other categories of expense are volume driven and reflect the Company's rapid
growth. Total noninterest expense for the Company is expected to decline in
relation to revenues as the Company's asset base grows. Regulatory assessments
increased by approximately $612,000 in the third quarter of 1996 due to a
one-time special assessment, required by recently enacted legislation, to
recapitalize the SAIF fund of the FDIC. See "Recent Developments -- Effect of
Recent Legislation." Management is currently evaluating a proposed sale of
Columbia Bank's credit card portfolio which, if consummated, will result in a
one-time gain. The sale of the business is not expected to have a material
effect on results of operations in future periods.

23
<PAGE> 25

Set forth below is a schedule showing additional detail concerning
increases and decreases in the Company's noninterest expense during the first
six months of 1996 compared with 1995.

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------------
INCREASE/
1996 (DECREASE) 1995
------ ---------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Compensation and employee benefits.......................... $4,989 $ 968 $4,021
Less: loan origination costs.............................. 1,362 1,078 284
------ ---------- ------
Net compensation and employee benefits (as reported)........ 3,627 (110) 3,737
Occupancy................................................... 1,616 272 1,344
Professional services....................................... 278 58 220
Advertising and promotion................................... 374 36 338
Printing and supplies....................................... 192 -- 192
Regulatory assessments...................................... 184 (136) 320
Data processing............................................. 363 68 295
Gains on real estate owned.................................. -- 264 (264)
Telephone & network......................................... 166 40 126
Postage & delivery.......................................... 173 36 137
ATM network................................................. 87 59 28
Bank card................................................... 651 200 451
Taxes, licenses and fees.................................... 321 50 271
Other....................................................... 1,336 420 916
------ ---------- ------
Total noninterest expense......................... $9,368 $1,257 $8,111
------ ---------- ------
------ ---------- ------
</TABLE>

In February 1996, the Company recorded a loss of $41,000 on the sale of its
only "real estate owned" property. Also, in March 1996, the Company recorded a
loss of $38,000 on a branch real estate transaction. In June 1996, the Company
wrote off $135,000 due to the abandonment of a potential branch site.

Income Taxes. Effective January 1, 1993, the Company adopted the FASB's
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"), which requires the use of the "asset and liability" method
of accounting for income taxes. Deferred income tax represents the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Upon adoption of SFAS 109, the Company recorded a deferred tax asset
with an equal valuation allowance due to uncertainties regarding the ability to
ultimately recognize the tax benefits from the net operating losses and certain
tax credits. The Company did not record an income tax expense from that date
through June 30, 1996 since the expected income tax expense, calculated by
applying statutory tax rates to income before income taxes, was offset by a
reduction in the valuation allowance established when the Company adopted SFAS
109.

At June 30, 1996, the deferred tax asset was $3.0 million and was partially
offset by the valuation allowance of $2.1 million. The deferred tax asset is
measured by applying tax rates to the difference between the carrying value and
the tax basis of assets and liabilities. Management anticipates that expected
income tax expense for 1996 will be substantially offset by a reduction in the
valuation allowance established when the Company adopted SFAS 109. Management
anticipates that the Company will record a provision for income taxes during
1997.

24
<PAGE> 26

Significant components of the Company's deferred tax assets and liabilities
at June 30, 1996 and December 31, 1995 and 1994 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
NOL carryforward.................................... $ 733 $ 1,478 $ 2,799
Tax credit carryover................................ 673 595 595
Allowance for loan losses........................... 1,499 1,274 922
Contributions....................................... 129 97 56
-------- ------- -------
Total deferred tax assets........................ 3,034 3,444 4,372
Less: valuation allowance........................... (2,051) (2,606) (3,580)
-------- ------- -------
Subtotal......................................... 983 838 792
Deferred tax liabilities:
FHLB stock dividends................................ (601) (551) (487)
SAIF special assessment............................. (104) -- --
Depreciation........................................ (26) (35) (53)
-------- ------- -------
Total deferred tax liabilities................... (731) (586) (540)
-------- ------- -------
Net deferred tax assets........................ $ 252 $ 252 $ 252
-------- ------- -------
-------- ------- -------
</TABLE>

For federal income tax purposes at June 30, 1996, the Company has available
net operating loss carryforwards to reduce future taxable income approximately
as follows:

<TABLE>
<CAPTION>
EXPIRATION DATE JUNE 30, DECEMBER 31,
DECEMBER 31, 1996 1995
---------------------------------------------------------------- -------- ------------
(IN THOUSANDS)
<S> <C> <C>
2002............................................................ $ -- $ 715
2003............................................................ -- 648
2004............................................................ 41 876
2005............................................................ 75 75
2006............................................................ 223 223
2008............................................................ 1,740 1,740
2009............................................................ 76 76
------- -----------
Total net operating loss carryforwards................ $2,155 $4,353
------- -----------
------- -----------
</TABLE>

Additionally, at June 30, 1996, the Company had alternative minimum tax,
investment and rehabilitation tax credit carryforwards of approximately
$673,000, of which $581,000 expires in 1997, $14,000 expires in 1999, and the
remainder in 2010. However, because of annual limitations on the utilization of
net operating loss carryforwards and because the Internal Revenue Code of 1986,
as amended, (the "Code") requires that net operating loss carryforwards be
utilized before tax credit carryforwards, the Company may not receive an income
tax benefit from the tax credit carryforwards, which may expire unused.

25
<PAGE> 27

A reconciliation of the Company's effective income tax rate with the
federal statutory tax rate is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
SIX MONTHS ------------------------------------------------------
ENDED
JUNE 30, 1996 1995 1994 1993
---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income (tax) benefit based on
statutory rate................... $(625 ) (34)% $(937 ) (34)% $ 209 34% $ 918 34%
Increase (reduction) resulting from
other nondeductible items........ 70 4 (37 ) (1) (27 ) (4) -- --
Valuation allowance................ 555 30 974 35 (182 ) (30) (918 ) (34)
----- ------- ----- ------- ----- ------- ----- -------
Income tax......................... $ -- --% $ -- --% $ -- --% $ -- --%
----- ------- ----- ------- ----- ------- ----- -------
----- ------- ----- ------- ----- ------- ----- -------
</TABLE>

Years Ended December 31, 1995, 1994 and 1993

Net Income. For 1995, the Company reported net income of $2.8 million,
compared with a net loss of $614,000 in 1994 and a net loss of $2.4 million in
1993. Net income per share amounted to $0.79 in 1995, compared with a net loss
per share of $0.18 in 1994 and a net loss per share of $1.06 in 1993. The loss
in 1993 was primarily due to the opening of Columbia Bank in Tacoma in August
1993 and the planned expansion and aggressive growth strategy of Columbia Bank
that began in that year, while 1994 earnings moved closer to break-even as
increased revenues related to the expansion began to be realized. Net income for
1995 was positively affected by increases in net interest margin and service
charges and fees.

Net Interest Income. Net interest income increased $5.0 million, or 43.0%,
in 1995 and $5.2 million, or 80.3%, in 1994. Net interest margin increased to
4.78% for 1995, compared with 4.54% in 1994 and 3.69% in 1993. Net interest
spread increased to 4.10% in 1995, compared with 4.02% in 1994 and 3.29% in
1993. The increase in net interest margin reflected a more favorable mix of
funding sources supporting earning assets. This change in mix was the result of
lower-cost deposits growing at a faster rate than higher-cost deposits and
borrowings.

The increase in net interest income in each year was largely due to the
overall growth of the Company. Net interest income in each year was also
favorably affected by average interest-earning assets increasing more rapidly
than average interest-bearing liabilities, with the difference funded by
noninterest-bearing deposits and shareholders' equity. Average interest-earning
assets increased $91.8 million and $80.8 million in 1995 and 1994, respectively,
while average interest-bearing liabilities increased only $77.7 million and
$63.3 million, respectively, during the same periods.

Provision for Loan Losses. For the years ended December 31, 1995, 1994 and
1993, net loan charge-offs amounted to $213,000, $281,000 and $49,000,
respectively. The Company's provision for loan losses was $1.3 million for 1995,
compared with $1.0 million for 1994 and $502,000 for 1993. During 1995, the
allowance for loan losses increased by $1.0 million to 1.06% of loans (excluding
loans held for sale) at December 31, 1995, from 1.01% of loans (excluding loans
held for sale) at December 31, 1994.

Noninterest Income. Total noninterest income increased $995,000, or 33.2%,
in 1995 and $953,000, or 46.6%, in 1994. Included in total noninterest income in
1995 and 1993 were $39,000 and $913,000 of nonrecurring gains on sales of
securities and loans. Excluding these gains, which can fluctuate significantly
from period to period, noninterest income increased $964,000, or 32.2%, in 1995
and $1.9 million, or 165.1%, in 1994. Mortgage banking revenue decreased
$388,000 in 1995 after increasing $270,000 and $452,000 in 1994 and 1993,
respectively. The decrease in 1995 is attributable to less emphasis on mortgage
banking after discontinuance of the separate mortgage subsidiary and a softer
market for residential mortgage loans, while increases in 1994 and 1993 were due
primarily to an increase in loan originations and sales of mortgage loans.
Income from bank

26
<PAGE> 28

cards and other income increased $699,000, or 71.9%, in 1995 and $910,000 in
1994 as a result of marketing efforts in 1995 and 1994.

Noninterest Expense. Total noninterest expense increased $2.5 million, or
17.9%, in 1995 and $3.4 million, or 31.7%, in 1994. Increases in noninterest
expense were primarily related to compensation and employee benefits, Washington
Business and Occupation taxes, bank card expense, data processing expenses and
advertising and promotion. These increases were due to the continuing expansion
of the Company. Included in noninterest expense for 1993 were pre-opening
expenses related to Columbia Bank's opening in Tacoma of approximately $1.0
million, consisting primarily of salaries, advertising, premises, furniture,
equipment and software expense. Also impacting noninterest expense were expenses
relating to the Company's merger with Columbia National Bankshares, Inc. which
was accounted for in a manner similar to a pooling-of-interests due to common
ownership, a writedown of data processing equipment and software at the
Company's former savings bank subsidiary and expenses related to the merger of
this subsidiary into Columbia Bank in 1994. Set forth below is a schedule
showing additional detail concerning increases and decreases in the Company's
noninterest expense for 1995 as compared with 1994:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
INCREASE/
1995 (DECREASE) 1994
------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Compensation and employee benefits.................... $ 8,427 $1,339 $ 7,088
Less: loan origination costs........................ 1,088 219 869
------- ---------- -------
Net compensation and employee benefits (as
reported)........................................... 7,339 1,120 6,219
Occupancy............................................. 2,845 43 2,802
Professional services................................. 436 9 427
Advertising and promotion............................. 634 126 508
Printing and supplies................................. 375 (22) 397
Regulatory assessments................................ 482 7 475
Data processing....................................... 615 152 463
Gains on real estate owned............................ (400) (86) (314)
Telephone & network................................... 271 (49) 320
Postage & delivery.................................... 223 76 147
ATM network........................................... 51 (21) 72
Bank card............................................. 1,019 346 673
Taxes, licenses and fees.............................. 711 386 325
Other................................................. 1,946 424 1,522
------- ---------- -------
Total noninterest expense................... $16,547 $2,511 $14,036
------- ---------- -------
------- ---------- -------
</TABLE>

Excluding nonrecurring expenses such as gains and costs related to real
estate owned, which can vary significantly from period to period, noninterest
expense increased approximately $2.5 million, or 17.5%, and $5.4 million, or
59.5%, in 1995 and 1994, respectively. Total noninterest expense was 80.5%,
96.3% and 125.9% of adjusted revenues (the sum of net interest income and
noninterest income less non-recurring gains) for 1995, 1994 and 1993,
respectively.

Income Taxes. The Company did not record income tax expense from January
1, 1993 through December 31, 1995 since the expected income tax expense,
calculated by applying statutory tax rates to income before income taxes, was
offset by a reduction in the valuation allowance established when the Company
adopted SFAS 109. For additional information concerning deferred tax assets and
liabilities, operating loss carryforwards and reconciliation of the Company's
effective income tax rate, see "-- Results of Operations -- Six Months Ended
June 30, 1996 and 1995 -- Income Taxes" and the Notes to Consolidated Financial
Statements.

27
<PAGE> 29

LIQUIDITY AND SOURCES OF FUNDS

The Company's primary sources of funds are customer deposits, brokered
deposits and advances from the Federal Home Loan Bank of Seattle (the "FHLB").
These funds, together with loan repayments, loan sales, retained earnings,
equity and other borrowed funds, are used to make loans, to acquire securities
and other assets and to fund continuing operations. Total deposits increased
11.3% to $402.9 million at June 30, 1996 from $361.9 million at December 31,
1995, and 34.7% at December 31, 1995 from $268.7 million at December 31, 1994.
FHLB advances increased $12.0 million during the first six months of 1996 to
$37.0 million. Advances outstanding from the FHLB totaled $25.0 million at
December 31, 1995 and $17.0 million at December 31, 1994. FHLB advances are
secured by one- to four-family real estate mortgages and certain other assets.
See "Business -- Source of Funds -- Borrowings." At June 30, 1996 the maximum
borrowing line from the FHLB was $97.0 million. Management anticipates that the
Company will continue to rely on the same sources of funds in the future and
will use those funds primarily to make loans and purchase securities.

To fund the growth of the Company, management's strategy has been to make
use of brokered and other wholesale deposits, as well as FHLB advances, while
working to build core deposits as rapidly as possible through the Company's
development of commercial banking relationships and its branch office network.
Brokered and wholesale deposits can be more expensive and more volatile in
comparison with core deposits obtained in the Company's market area. The deposit
increase of $41.0 million during the first six months of 1996 occurred entirely
in core deposits. Brokered and other wholesale deposits (excluding public
deposits) decreased $13.2 million to $35.1 million, or 8.7% of total deposits at
June 30, 1996, from $48.3 million, or 13.3% of total deposits at December 31,
1995, though management anticipates continued, and perhaps increasing, use of
such deposits to fund increasing loan demand. However, management anticipates
use of brokered deposits will decrease over time as a percent of total deposits.
Brokered and other wholesale deposits (excluding public deposits) amounted to
$48.3 million and $60.8 million at December 31, 1995 and 1994, respectively.

Brokered and other wholesale deposits are summarized below. Such deposits
had an average interest rate of 5.63%, 5.94%, 5.21% and 4.53% at June 30, 1996,
December 31, 1995, 1994 and 1993, respectively.

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
JUNE 30,
1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL
AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS AMOUNT DEPOSITS
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Maturing within one year........ $31,691 7.9% $41,546 11.5% $37,642 14.0% $6,947 4.2%
Maturing after one year, but
within three years............ 3,371 0.8 6,724 1.8 22,542 8.4 19,118 11.6
Maturing after three years, but
within ten years.............. -- -- -- -- 596 0.2 1,291 0.7
------ ----- ------ ----- ------ ----- ------ -----
Total brokered and other
wholesale deposits.... $35,062 8.7% $48,270 13.3% $60,780 22.6% $27,356 16.5%
------ ----- ------ ------ ------ ------ ------ ------
------ ----- ------ ------ ------ ------ ------ ------
</TABLE>

ASSET/LIABILITY MANAGEMENT

The mismatch between maturities and interest-rate sensitivities of balance
sheet items results in interest rate risk. The Company maintains asset/liability
management policies that provide guidelines for controlling exposure to interest
rate risk.

Although analysis of an institution's interest rate gap (the difference
between the repricing of interest-earning assets and interest-bearing
liabilities during a given period of time) is one standard tool for the
measurement of the exposure to interest rate risk, the Company believes that,
because interest rate gap analysis does not address all factors that can affect
earnings performance, such as early withdrawal of time deposits and prepayment
of loans, it should not be used as the primary

28
<PAGE> 30

indicator of exposure to interest rate risk and the related volatility of net
interest income in a changing interest rate environment.

The following tables set forth the estimated maturity or repricing and the
resulting interest rate gap of the Company's interest-earning assets and
interest-bearing liabilities at June 30, 1996. The amounts in the table are
derived from the Company's internal data, and because certain assumptions have
been utilized in presenting this data, the amounts may not be consistent with
financial information appearing elsewhere in this Prospectus that has been
prepared in accordance with generally accepted accounting principles. The
amounts in the tables also could be significantly affected by external factors,
such as changes in prepayment assumptions, early withdrawal of deposits and
competition.

29
<PAGE> 31

<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING WITHIN
---------------------------------------------------------------
0-3 4-12 1-5 5-10 MORE THAN
MONTHS MONTHS YEARS YEARS 10 YEARS TOTAL
-------- -------- -------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-earning deposits... $ 10,415 $ -- $ -- $ -- $ -- $ 10,415
Securities.................. 2,180 6,143 18,230 1,448 4,082 32,083
Loans:
Business and commercial
real estate............ 143,976 7,344 27,940 5,401 1,806 186,467
One- to four-family...... 75,360 24,910 52,749 3,539 11,293 167,851
Consumer................. 5,384 21,748 19,464 813 1,052 48,461
-------- -------- -------- ------- -------- --------
Total
interest-earning
assets............ $237,315 $ 60,145 $118,383 $11,201 $18,233 $445,277
-------- -------- -------- ------- -------- --------
-------- -------- -------- ------- -------- --------
Noninterest-earning
assets................... -- 726 -- -- 35,609 36,335
-------- -------- -------- ------- -------- --------
Total assets........ $237,315 $ 60,871 $118,383 $11,201 $53,842 $481,612
-------- -------- -------- ------- -------- --------
-------- -------- -------- ------- -------- --------
Percent of total interest-
earning assets........... 53.29% 13.51% 26.59% 2.52% 4.09% 100.00%
-------- -------- -------- ------- -------- --------
-------- -------- -------- ------- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits:
Money market checking....... $107,245 $ -- $ -- $ -- $ -- $107,245
NOW accounts................ 6,773 -- 27,090 -- -- 33,863
Savings accounts............ 7,104 -- 7,104 7,104 21,312
Time certificates of
deposit.................. 61,605 81,932 34,381 11 -- 177,929
FHLB advances............... 27,000 -- 10,000 -- -- 37,000
Convertible subordinated
notes.................... -- -- -- 2,363 -- 2,363
-------- -------- -------- ------- -------- --------
Total
interest-bearing
liabilities....... $209,727 $ 81,932 $ 71,471 $ 9,478 $ 7,104 $379,712
-------- -------- -------- ------- -------- --------
-------- -------- -------- ------- -------- --------
Noninterest-bearing
liabilities and equity... 50,068 -- 12,517 -- 39,315 101,900
-------- -------- -------- ------- -------- --------
Total liabilities
and equity........ $259,795 $ 81,932 $ 83,988 $ 9,478 $46,419 $481,612
-------- -------- -------- ------- -------- --------
-------- -------- -------- ------- -------- --------
Percent of total interest-
earning assets........... 47.10% 18.40% 16.05% 2.13% 1.60% 85.28%
-------- -------- -------- ------- -------- --------
-------- -------- -------- ------- -------- --------
Rate sensitivity gap.......... $ 27,588 ($21,787) $ 46,912 $ 1,723 $11,129 $ 65,565
Cumulative rate
sensitivity gap............. $ 27,588 $ 5,801 $ 52,713 $54,436 $65,565
Rate sensitivity gap as a
percentage of
interest-earning assets..... 6.19% (4.89)% 10.54% 0.39% 2.49% 14.72%
Cumulative rate sensitivity
gap as a percentage of
interest-earning assets..... 6.19% 1.30% 11.84% 12.23% 14.72%
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
</TABLE>

As stated above, certain shortcomings are inherent in the method of
analysis presented in the foregoing tables. For example, although certain assets
and liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other types
may lag behind changes in market interest rates. Additionally, certain assets,
such as adjustable-rate mortgages, have features which restrict changes

30
<PAGE> 32

in the interest rates of such assets both on a short-term basis and over the
lives of such assets. Further, in the event of a change in market interest
rates, prepayment and early withdrawal levels could deviate significantly from
those assumed in calculating the tables. Finally, the ability of many borrowers
to service their adjustable-rate debt may decrease in the event of a substantial
increase in market interest rates.

CAPITAL RESOURCES

Shareholders' equity at June 30, 1996 was $33.8 million compared with $32.0
million at December 31, 1995. The increase was primarily due to net income
during the first six months of 1996, partially offset by an increase in the
reserve for unrealized losses on securities available for sale. Shareholders'
equity was 7.0% and 7.5% of total period-end assets at June 30, 1996 and
December 31, 1995, respectively.

Shareholders' equity at December 31, 1995, was $32.0 million compared with
$28.9 million at December 31, 1994. The increase was due to net income for the
year of $2.8 million and a decrease in the reserve for unrealized losses on
securities available for sale. Shareholders' equity was 7.5% and 9.0% of total
assets at December 31, 1995 and December 31, 1994, respectively.

The Company plans to contribute approximately $10.0 million of the net
proceeds of the offering to Columbia Bank, primarily to fund additional loan
growth. The remainder of the net proceeds will be used to repay $3.0 million
borrowed under a line of credit, which is secured by the outstanding shares of
common stock of Columbia Bank, and for general corporate purposes. Management
presently intends to retain earnings, if any, to support anticipated growth.
Accordingly, the Company does not intend to pay cash dividends on the Common
Stock in the foreseeable future. See "Dividends."

Columbia Bank is subject to minimum capital requirements. See "Supervision
and Regulation -- Banking Subsidiary." The Company has established a line of
credit with a commercial bank, secured by Columbia Bank stock, which can be used
to augment the capital of Columbia Bank. At September 30, 1996, $3.0 million was
outstanding. A portion of the proceeds will be used to pay off that loan. See
"Use of Proceeds." As the following table indicates, at June 30, 1996, and as
adjusted to reflect the issuance and sale of the Common Stock, and the
application of the net proceeds therefrom, Columbia Bank exceeded regulatory
capital requirements:

<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------------------------
MINIMUM WELL-CAPITALIZED ACTUAL AS ADJUSTED
REQUIREMENT REQUIREMENT RATIO RATIO
----------- ---------------- ------ -----------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital................. 4.00% 6.00% 9.56 % 11.82%
Total risk-based capital.................. 8.00% 10.00% 10.68 % 12.91%
Leverage ratio............................ 3.00% 5.00% 8.12 % 10.08%
</TABLE>

Management expects that the net proceeds of the offering, together with
internally generated funds, will allow Columbia Bank to remain
"well-capitalized" for regulatory purposes, although there can be no assurance
that additional capital will not be required in the near future due to
greater-than-expected growth, net losses or a combination thereof.

IMPACT OF INFLATION AND CHANGING PRICES

The primary impact of inflation on the Company's operations is increased
operating costs. Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Although interest rates do not necessarily move in the same direction or to the
same extent as the prices of goods and services, increases in inflation
generally have resulted in increased interest rates.

31
<PAGE> 33

RECENT FINANCIAL ACCOUNTING PRONOUNCEMENTS

In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 requires the Company to elect to account for stock-based compensation on a
fair value basis or an intrinsic value basis. The intrinsic value basis is
currently used by the Company and is the accounting principal prescribed by
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). SFAS 123 requires disclosure in the footnotes of the pro forma
impact on net income and earnings per share of the difference between
compensation expense using the intrinsic value method and the fair value method.
The adoption of SFAS 123 is required for the fiscal year ended December 31,
1996. The Company expects to continue to apply APB 25 for measurement of stock
compensation and will provide disclosure required by SFAS 123 beginning in
fiscal year 1996.

In June 1996, the FASB issued Statement of Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" ("SFAS 125"). SFAS 125 requires the Company to recognize all
financial assets and servicing that it controls and liabilities that it has
incurred after a transfer of financial assets. The Company must also
"derecognize" financial assets when control has been surrendered and must
derecognize liabilities when extinguished. SFAS 125 is not expected to have a
significant impact on the Company.

32
<PAGE> 34

BUSINESS

GENERAL

The Company was originally organized in 1988 under the name "First Federal
Corporation" in connection with the acquisition by an investor group, which
included recently deceased director emeritus Stanley Rose and current director
Sidney Snyder, of a savings association, which was later named Columbia Savings
Bank, a Federal Savings Bank (the "Savings Bank"). In 1990, an investor group
headed by Mr. Espe and financed in part by NorCap, LLC acquired from Mr. Rose a
controlling interest in the Company, a second corporation, Columbia National
Bankshares, Inc. ("CNBI"), and CNBI's sole subsidiary, Columbia National Bank,
located in Longview, Washington. See "Security Ownership of Certain Beneficial
Owners and Management" and "Certain Transactions -- NorCap Options". In
connection with the 1993 reorganization of the Company, CNBI was merged into the
Company, Columbia National Bank was merged into the newly chartered Columbia
State Bank and additional management was added. In 1994, the Savings Bank was
merged into Columbia Bank.

The 1993 reorganization was undertaken in order to take advantage of
commercial banking business opportunities resulting from increased consolidation
of banks in the Company's principal market area, primarily through acquisitions
by out-of-state holding companies, and the resulting dislocation of customers.
In August 1993, the Company completed a public offering of common stock with net
proceeds of approximately $17.2 million, of which the Company contributed
approximately $16.3 million to the capital of Columbia Bank. In connection with
the reorganization, the Company moved its headquarters to Tacoma, Washington,
with the intent of focusing on growth opportunities in the Tacoma metropolitan
area and contiguous parts of the Puget Sound region. Management believes the
ongoing consolidation among financial institutions in Washington has created
significant gaps in the ability of large banks operating in Washington to serve
certain customers, particularly the Company's target customer base of small and
medium-sized businesses, professionals and other individuals. The business
strategy of the Company is to provide its customers with the financial
sophistication and breadth of products of a regional bank while retaining the
appeal and service level of a community bank. As a result of the Company's
strong commitment to highly personalized customer service, its varied products,
and the longstanding community presence of its managers, lending officers and
branch personnel, the Company believes it is well positioned to attract new
customers and to increase its market share in lending and deposits.

STRATEGY

The Company's goal is to create, over the next several years, a
well-capitalized, customer-focused Pacific Northwest commercial banking
institution with a significant presence in selected markets and total assets in
excess of $1.0 billion. Management believes that the ongoing consolidation in
its principal market area affords an opportunity for aggressive growth in loans
and deposits. The Company's growth strategy consists of the following elements:

- Focus on relationship lending to small and medium-sized businesses,
professionals and other individuals whom the Company believes are
underserved by larger banks in its market area and are attracted by the
Company's "customer first" philosophy.

- Fund loan growth through the creation of a branch system catering
primarily to retail depositors, supplemented by business banking customer
deposits and other borrowings.

- Continue growth in the Tacoma metropolitan area and selectively expand
into neighboring King and Thurston Counties.

- Control credit risk through established loan underwriting and monitoring
procedures, loan concentration limits, product and industry
diversification, and the hiring of experienced lending personnel with a
high degree of familiarity with their market area.

33
<PAGE> 35

Focus on Relationship Lending. The Company focuses on lending to small and
medium-sized businesses, professionals and other individuals who value high
levels of customer service from a locally based institution. The Company
believes that there are significant commercial banking business opportunities
arising from the ongoing consolidation of banks in its principal market area,
primarily through acquisitions by out-of-state holding companies, and the
resulting dislocation of customers. Management believes that many business
customers of previously acquired banks are dissatisfied with low levels of
service and the lack of personal contact, flexibility and local decision-making
authority at these institutions, and thus are willing to transfer their primary
banking relationship to a customer-service oriented institution like the Company
which can be more responsive to their specific needs. As part of its effort to
provide responsive service to its target customers, the Company markets a varied
menu of relationship banking products, including private banking and cash
management services. Management continually strives to develop a business
culture in which customers are accorded the highest priority in all aspects of
the Company's operations. This "customer first" philosophy is combined with the
Company's emphasis on personalized, local decision-making in each of the markets
it serves.

Create a Branch-Based Deposit Franchise. In order to fund its lending
activities, the Company is establishing a branch system catering primarily to
retail depositors, supplemented by business banking customer deposits and other
borrowings. The Company believes this mix of funding sources will enable it to
expand its commercial lending activities rapidly while establishing a stable
core deposit base. Additionally, the Company's strategically placed branch
offices allow for increased contact with customers. While the Company's primary
lending focus will continue to be on business lending, management believes that
its consumer deposit and lending activities will produce significant benefits,
including increased core deposits and greater loan portfolio diversification.

Geographic Expansion. The Company currently has regulatory approval to
open four additional branches in Pierce County, and anticipates opening several
more branches in the next few years to strengthen its local market position and
capitalize on expansion opportunities resulting from the strong demand for a
locally based banking institution. The Company also currently anticipates
expansion into neighboring Thurston County (the location of Olympia,
Washington's state capitol) and parts of neighboring King County, such as
Bellevue and surrounding areas and the Auburn and Kent Valley areas. The Company
plans to effect its growth strategy through a combination of growth at existing
branch facilities, new branch openings and acquisitions. Typically, expansion
into new markets will be in connection with the hiring of an experienced branch
manager and/or lending officers with strong community ties and banking
relationships.

Control Credit Risk. Management considers the maintenance of high asset
quality, with corresponding low levels of nonperforming assets and charge-offs,
to be of utmost importance as it pursues its growth strategy. The Company has
implemented loan underwriting and monitoring procedures and loan concentration
limits which management believes permit continued portfolio expansion without
materially increasing credit risk. The Company will also seek to control credit
risk as it grows through increased product and industry diversification, by
expanding its loan product offerings and related services, and through the
hiring of experienced lending personnel with a high degree of familiarity with
their market area.

MARKET AREA

The Company's principal market area is the Tacoma metropolitan area and
contiguous parts of the Puget Sound region of Washington state. The economy of
that area, while primarily dependent upon aerospace, foreign trade and natural
resources, including agriculture and timber, has become more diversified over
the past decade as a result of the success of Microsoft and the establishment of
numerous research and biotechnology firms. The Washington economy and that of
the Puget Sound region generally have experienced moderate growth and stability
in recent years. According to the Puget Sound Economic Forecaster, a regional
publication providing economic forecasts and

34
<PAGE> 36

commentary, the greater Puget Sound economy is projected to expand at nearly
twice the national rate for the years 1997 through 1999. The region is projected
to add 220,000 new jobs and 290,000 new residents during this time. Boeing, the
region's largest employer, has announced increased production after recent years
of declining orders for aircraft and related reductions in its work force.
Microsoft and other major employers in the area east of Seattle also anticipate
continued growth.

Pierce County, the area in which the Company's expansion is primarily
focused, is located in the South Puget Sound region. The economy of this area is
well-diversified, with the principal industries being aerospace, shipping,
military-related government employment, agriculture and forest products. Pierce
County's economy is expected to benefit over the next few years because of
Intel's decision to build a computer chip facility in DuPont and the expansion
of the Matsushita semi-conductor plant in Puyallup, east of Tacoma. The Puget
Sound Economic Forecaster predicts that Pierce County will likely have the
strongest economic performance in the Puget Sound region through 1999. Forbes
magazine recently published its prediction that the Tacoma area would be among
the top twenty-five cities in the United States in terms of job growth,
especially in the area of computers and semiconductors.

Bellevue, where the Company has one office and may seek to open or acquire
a second, is located in an area known as the "Eastside", a metropolitan area
with a population of approximately 215,000 that includes several cities located
east of Seattle. A large portion of the Eastside economy is linked to aerospace,
construction, computer software and biotechnology industries. Microsoft is
headquartered just north of Bellevue and several biotech firms are located on
the Eastside. In recent years, the Eastside has experienced relatively rapid
growth in population and employment, and household incomes in the Eastside are
among the highest in Washington.

The Company anticipates further expanding into neighboring south King
County, which contains several residential communities whose employment base is
supported by light industrial, aerospace and forest products industries. With
its close proximity to Tacoma, this market area is considered an important
natural extension of the Company's Pierce County market area. The Weyerhaeuser
Corporation maintains its world headquarters in Federal Way, which is located in
south King County adjacent to the King/Piece County line. The Auburn and Kent
Valley areas to the east of Federal Way are also considered by management to be
natural areas of expansion for the Company.

Expansion south of Tacoma into Thurston County is also considered by
management to be an extension of the Company's Pierce County market area.
Olympia, with a population of approximately 38,000, and the neighboring
community of Lacey, with a population of approximately 26,000, are the principal
cities in Thurston County. As of April 1996, the county had an approximate
population of 193,000. The area enjoys a stable economic climate due largely to
state government employment and the proximity of the Fort Lewis army base and
McChord Air Force Base. According to the Thurston County Regional Planning
Council, out of a total civilian work force of 88,000, approximately 33% were
employed by federal, state and local government. The area also has a significant
population of retired military personnel.

The Company's market area also includes the Longview and Woodland
communities in southwestern Washington. The population of Cowlitz County, in
which Longview and Woodland are located, is approximately 85,000. Cowlitz
County's economy has become more diversified in recent years, but remains
materially dependent on the forest products industry and, as a result, is
relatively vulnerable to the cyclical downturns of that industry as well as
environmental disputes.

LENDING ACTIVITIES

General

The Company originates a wide variety of loans. Since its 1993
reorganization, the Company has significantly increased commercial business
loans and consumer loans as a percentage of its total

35
<PAGE> 37

loan portfolio. During the same period the percentage of loans consisting of
multi-family and commercial real estate loans has also increased while
single-family and real estate construction loan percentages have declined. The
Company also emphasizes its private banking services to high income and high net
worth individuals.

The following table sets forth at the dates indicated the Company's loan
portfolio composition by type of loan:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------
JUNE 30, 1996 1995 1994 1993 1992 1991
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
% OF % OF % OF % OF % OF % OF
BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL BALANCE TOTAL
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial...... $132,251 32.9% $113,775 32.2% $ 72,829 27.1% $ 44,772 24.7% $ 16,511 13.7% $ 12,707 13.7%
Real estate:
One- to
four-family
residential... 69,364 17.3 67,991 19.3 76,260 28.3 55,804 30.8 53,161 44.0 53,084 57.5
Five or more
family
residential
and
commercial
properties... 117,486 29.2 97,103 27.5 -- 25.5 45,193 25.0 30,681 25.4 22,776 24.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total
real
estate... 186,850 46.5 165,094 46.8 144,791 53.8 100,997 55.8 83,842 69.4 75,860 82.1
Real estate
construction:
One- to
four-family
residential... 23,870 6.0 22,741 6.5 17,411 6.5 16,328 9.0 9,408 7.8 -- --
Five or more
family
residential
and
commercial
properties... 10,466 2.6 8,884 2.5 4,004 1.5 4,799 2.7 4,689 3.9 -- --
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real
estate
construction... 34,336 8.6 31,625 9.0 21,415 8.0 21,127 11.7 14,097 11.7 -- --
Consumer........ 48,547 12.1 43,343 12.2 30,860 11.4 14,417 8.0 6,584 5.4 3,937 4.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Subtotal... 401,984 100.1 353,837 100.2 269,895 100.3 181,313 100.2 121,034 100.2 92,504 100.1
Less deferred
loan fees and
other......... (430) (0.1) (744) (0.2) (899) (0.3) (297) (0.2) (237) (0.2) (121) (0.1)
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total
loans... $401,554 100.0% $353,093 100.0% $268,996 100.0% $181,016 100.0% $120,797 100.0% $ 92,383 100.0%
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
-------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Loans held for
sale.......... $ 1,950 $ 1,367 $ 1,612 $ 1,777 $ 2,021 $ --
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>

The following table presents at June 30, 1996, (i) the aggregate maturities
of loans in the named categories of the Company's loan portfolio and (ii) the
aggregate amounts of variable and fixed rate loans that mature after one year:

<TABLE>
<CAPTION>
MATURING
-------------------------------------------------------------
AFTER 5
WITHIN 1 YEAR 1-5 YEARS YEARS TOTAL
------------- -------------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial............................ $ 113,285 $ 15,790 $3,176 $ 132,251
Real estate construction.............. 34,107 74 155 34,336
------------ ------------ ---------- ---------
Total....................... $ 147,392 $ 15,864 $3,331 $ 166,587
------------ ------------ ---------- ---------
------------ ------------ ---------- ---------
Fixed-rate loans...................... $ 13,459 $3,331 $ 16,790
Variable-rate loans................... 2,405 -- 2,405
------------ ---------- ---------
Total....................... $ 15,864 $3,331 $ 19,195
------------ ---------- ---------
------------ ---------- ---------
</TABLE>

Commercial and Private Banking Lending

Commercial loans increased to $132.3 million at June 30, 1996, representing
32.9% of its total loans, from $113.8 million at December 31, 1995 and $72.8
million at December 31, 1994. These increases at actual and annualized rates
exceeding 30% per year reflect management's commitment to provide competitive
commercial lending in the Company's primary market area. Commercial loans
constitute a wide variety of lending products, including term loans, lines of
credit and equipment financing. A broad range of short-to medium-term commercial
loans, both collateralized and uncollateralized, is made available to businesses
for working capital (including inventory and

36
<PAGE> 38

receivable loans), business expansion (including acquisitions and improvement of
real estate), and the purchase of equipment and machinery. In addition, in order
to develop and maintain long-term multiple account banking relationships with
its business customers, the Company's private banking department offers a wide
range of lending and other products to owners or key employees of such
businesses.

Generally, commercial and private banking loans are underwritten on the
basis of the borrower's ability to service the debt from cash flow generated
from business or investments and, in the case of private banking, also from
employment income. The Company generally collateralizes such loans with real
estate, equipment, securities or other assets. The value of assets
collateralizing commercial loans is often not subject to readily available
appraisals and usually varies substantially depending upon the success of the
business. Commercial and private banking loans are typically tied to a floating
interest rate.

The Company expects to continue to expand its commercial lending products
and emphasize in particular its relationship banking with businesses, business
owners and professional individuals.

Real Estate Lending

One- to Four-Family Residential Real Estate Lending. Residential one- to
four-family loans amounted to $69.4 million at June 30, 1996, representing 17.3%
of total loans, compared to $68.0 million and $76.3 million at December 31, 1995
and 1994, respectively. The majority of these loans were originated by the
Savings Bank and are used by the Company to collateralize advances from the
FHLB. The Company's underwriting standards require that one- to four-family
portfolio loans generally be owner-occupied and that loan amounts not exceed 80%
(90% with private mortgage insurance) of the appraised value or cost, whichever
is lower, of the underlying collateral at origination. Generally, management's
policy is to originate for sale to third parties residential loans secured by
properties located within the Company's primary market areas.

Multi-family and Commercial Real Estate Lending. The Company makes
multi-family and commercial real estate loans in its primary market areas.
Multi-family and commercial real estate lending increased to $117.5 million at
June 30, 1996, representing 29.2% of total loans, from $97.1 million and $68.5
million at December 31, 1995 and 1994, respectively. At June 30, 1996, 36.0% of
the $128.0 million multi-family and commercial real estate loan portfolio,
including commercial real estate construction loans, consisted of loans to
acquire, expand or improve owner-occupied income-producing real estate such as
manufacturing plants, distribution centers and office facilities. At that same
date, 17.6% of the $128.0 million multi-family and commercial real estate loan
portfolio consisted of loans to acquire, expand or improve multi-family
residential units and 46.4% consisted of loans to acquire, expand or improve
non-owner-occupied commercial real estate. The Company has recently determined
to reduce new loan originations of non-owner-occupied commercial real estate.
The Company's underwriting standards generally require that the loan-to-value
ratio for multi-family and commercial loans not exceed 75% of appraised value or
cost, whichever is lower, and that commercial properties maintain debt coverage
ratios (net operating income divided by annual debt servicing) of 1.20 or
better.

Construction Loans. The Company originates one- to four-family residential
construction loans for the construction of custom homes (where the home buyer is
the borrower) and provides financing to builders for the construction of
pre-sold homes and speculative residential construction. The Company endeavors
to limit its construction lending risk through adherence to strict underwriting
procedures. Also, the Company generally requires prompt and thorough
documentation of all draw requests and utilizes third party inspectors to
inspect the project prior to paying any draw requests from the builder.
Construction loans on one- to four-family residences increased to $23.9 million
at June 30, 1996, representing 6.0% of total loans, from $22.7 million and $17.4
million for fiscal years 1995 and 1994, respectively.

37
<PAGE> 39

The Company is also active in multi-family and commercial real estate
construction lending. Such loans amounted to $10.5 million at June 30, 1996,
representing 2.6% of total loans, compared with $8.9 million and $4.0 million at
December 31, 1995 and 1994, respectively. The Company's policy is generally to
require personal guarantees of the principals of the companies that are
developing multi-family or commercial real estate projects. Management's policy
is to make commitments for such loans only on projects located within the
Company's primary market areas.

Consumer Lending

At June 30, 1996, the Company had $48.5 million of consumer loans
outstanding, representing 12.1% of total loans, as compared with $43.3 million
at December 31, 1995 and $30.9 million at December 31, 1994. Consumer loans made
by the Company include automobile loans, boat and recreational vehicle
financing, home equity and home improvement loans and miscellaneous personal
loans. The terms of these loans typically range from 12 to 60 months and vary
based upon the nature of collateral and size of loan. Since 1993, the Company
has originated and underwritten its own credit card receivables. Management is
currently considering the sale of the Company's credit card loan portfolio.

Consumer loans are attractive to the Company because they typically have a
short term and carry higher interest rates than those charged on other types of
loans. Installment loans do, however, pose additional risks of collectibility
when compared to other traditional types of loans granted by commercial banks,
such as commercial and residential mortgage loans. In many instances, the
Company is required to rely on the borrower's ability to repay since the
collateral may be of reduced value at the time of collection. Accordingly, the
initial determination of the borrower's ability to repay is of primary
importance in the underwriting of consumer loans.

Loan Approvals

The Company's loan policies establish the basic policies and procedures
governing its lending operations. Generally, the policies address the types of
loans that the Company seeks, target markets, underwriting and collateral
requirements, terms, interest rate and yield considerations and compliance with
laws and regulations. All loans or credit lines are subject to approval
procedures and amount limitations. These limitations apply to the borrower's
total outstanding indebtedness to the Company, including the indebtedness of any
guarantor. The policies are reviewed and approved annually by the Board of
Directors of Columbia Bank. The Company supplements its own supervision of the
loan underwriting and approval process with periodic loan audits by experienced
internal loan examiners who examine quality, loan documentation and compliance
with laws and regulations. Loan reviews by outside professionals who are
experienced in loan review work may also be utilized as management or the Board
of Directors deems appropriate.

The Loan Committee consists of Columbia Bank's Senior Vice President and
Senior Credit Administrator, who is chairman of the Loan Committee, and four
additional senior Bank officers. The Committee has a loan authority limit of
$3.0 million. Amounts over that amount are reviewed by the Executive Loan
Committee, consisting of the Chairman and Chief Executive Officer, the
President, the Senior Credit Administrator and the Loan Production
Administrator, or the Board of Directors of Columbia Bank. In addition, reports
on all loans over $100,000 which are past due but not criticized, all new and
renewed loans over $250,000 and all non-accrual and problem loans are reviewed
by the Board of Directors of Columbia Bank on a regular basis. Loans to one
borrower are generally subject to a statutory limit of 20% of unimpaired capital
and surplus. The Company's legal lending limit was $7.4 million at June 30,
1996. As a matter of policy, the Company seldom makes loans approaching its
legal lending limit.

38
<PAGE> 40

Delinquencies and Nonperforming Assets

Nonperforming assets consist of nonaccrual loans, restructured loans and
real estate owned. The following tables set forth at the dates indicated
information with respect to nonaccrual loans, restructured loans, total
nonperforming loans (nonaccrual loans plus restructured loans), real estate
owned and total nonperforming assets of the Company:

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------------------------
1996 1995 1994 1993 1992 1991
-------- ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans..................... $ 676 $ 435 $ 452 $1,631 $ 650 $ 728
Restructured loans................... 69 29 44 94 109 116
------- ------ ------ ------ ------ ------
Total nonperforming
loans.................... 745 464 496 1,725 759 844
Real estate owned.................... -- 3,304 3,227 3,305 2,959 2,523
------- ------ ------ ------ ------ ------
Total nonperforming
assets................... $ 745 $3,768 $3,723 $5,030 $3,718 $3,367
------- ------ ------ ------ ------ ------
------- ------ ------ ------ ------ ------
Accruing loans past-due 90 days or
more............................... $ 260 $ 152 $ 82 $ -- $ -- $ --
Potential problem loans.............. 465 37 23 1,508 (1) (1)
Allowance for loan losses............ 4,411 3,748 2,711 1,992 1,539 1,426
Nonperforming loans to loans......... 0.19% 0.13% 0.18% 0.95% 0.62% 0.91%
Allowance for loan losses to loans... 1.10 1.06 1.01 1.10 1.25 1.54
Allowance for loan losses to
nonperforming loans................ 592.08 807.76 546.57 115.48 202.77 168.96
Nonperforming assets to total
assets............................. 0.15 0.89 1.17 2.13 2.34 2.79
</TABLE>

- ---------------
(1) Information not available for 1992 and 1991.

The consolidated financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on its loan portfolio,
unless a loan is placed on a nonaccrual basis. Loans are placed on a nonaccrual
basis when there are serious doubts about the collectibility of principal or
interest. Generally, the Company's policy is to place a loan on nonaccrual
status when the loan becomes past due 90 days. Restructured loans are those for
which concessions, including the reduction of interest rates below a rate
otherwise available to that borrower or the deferral of interest or principal,
have been granted due to the borrower's weakened financial condition. Interest
on restructured loans is accrued at the restructured rates when it is
anticipated that no loss of original principal will occur. Potential problem
loans are loans which are currently performing and are not included in
nonaccrual or restructured loans above, but about which there are serious doubts
as to the borrower's ability to comply with present repayment terms and,
therefore, will likely be included later in nonaccrual, past due or restructured
loans. These loans are considered by management in assessing the adequacy of the
allowance for loan losses.

At June 30, 1996 and at December 31, 1995 and 1994, the Company had
nonaccrual loans of $676,000, $435,000 and $452,000, respectively. At each date,
nonaccrual loans constituted less than 0.20% of loans outstanding. In February
1996, the Company sold all its "real estate owned" (which consisted of one
property in the State of Washington), thus reducing total nonperforming assets
to $745,000, or 0.19%, of total loans (excluding loans held for sale) at June
30, 1996, from $3.8 million, or 1.1%, of total loans at year end 1995.

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level considered adequate
by management to provide for anticipated loan losses based on management's
assessment of various factors affecting the loan portfolio, including a review
of problem loans, business conditions and loss experience and an overall
evaluation of the quality of the underlying collateral, holding and disposal
costs and costs

39
<PAGE> 41

of capital. The allowance is increased by provisions charged to operations and
reduced by loans charged off, net of recoveries.

While management believes that it uses the best information available to
determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in determining the allowance.

The following tables show the allocation of the allowance for loan losses
at June 30, 1996 and at the last five year ends. The allocation is based on an
evaluation of defined loan problems, historical ratios of loan losses and other
factors which may affect future loan losses in the categories of loans shown.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
JUNE 30, 1996 1995 1994
----------------- ----------------- -----------------
% OF % OF % OF
TOTAL TOTAL TOTAL
BALANCE APPLICABLE TO: AMOUNT LOANS(2) AMOUNT LOANS(2) AMOUNT LOANS(2)
- ------------------------------------ ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial.......................... $2,393 32.8% $1,796 32.2% $1,369 27.0%
Real estate(1):
One- to four-family residential... 660 23.2 560 25.6 687 34.7
Five or more family residential
and commercial properties...... 273 31.9 187 30.0 146 26.9
Consumer............................ 319 12.1 284 12.2 216 11.4
Unallocated......................... 766 921 293
----- ------- ----- ------- ----- -------
Total..................... $4,411 100.0% $3,748 100.0% $2,711 100.0%
----- ------- ----- ------- ----- -------
----- ------- ----- ------- ----- -------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1993 1992 1991
----------------- ----------------- -----------------
% OF % OF % OF
TOTAL TOTAL TOTAL
BALANCE APPLICABLE TO: AMOUNT LOANS(2) AMOUNT LOANS(2) AMOUNT LOANS(2)
- ------------------------------------ ------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial.......................... $ 389 23.6% $ 348 13.2% $ 287 13.4%
Real estate(1):
One- to four-family residential... 489 42.6 390 53.4 381 58.4
Five or more family residential
and commercial properties...... 545 26.3 264 28.2 334 24.0
Consumer............................ 138 7.5 88 5.2 50 4.2
Unallocated......................... 431 449 374
----- ------- ----- ------- ----- -------
Total............................. $1,992 100.0% $1,539 100.0% $1,426 100.0%
----- ------- ----- ------- ----- -------
----- ------- ----- ------- ----- -------
</TABLE>

- ---------------
(1) Real estate includes real estate construction loans.

(2) Represents the total of all outstanding loans in each category as a percent
of total loans outstanding.

40
<PAGE> 42

The following table sets forth for the periods indicated information
regarding changes in the Company's allowance for loan losses:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ----------------------------------------------------
1996 1995 1994 1993 1992 1991
---------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total loans, net at end of
period(1).................. $401,554 $353,093 $268,996 $181,016 $120,797 $ 92,383
Daily average loans.......... 378,281 318,039 222,236 140,353 107,182 82,828
Balance of allowance for loan
losses at beginning of
period..................... 3,748 2,711 1,992 1,539 1,426 1,704
Charge-offs:
Commercial................. (44) (148) (258) (72) (45) (316)
Real estate(2)............. (49) (233)
Consumer................... (67) (115) (106) (38) (32) (56)
--------- -------- -------- -------- -------- --------
Total
charge-offs...... (111) (263) (364) (110) (126) (605)
Recoveries:
Commercial................. 14 45 83 56 47 230
Real estate(2)............. 1 16
Consumer................... -- 5 -- 5 16 1
--------- -------- -------- -------- -------- --------
Total recoveries... 14 50 83 61 64 247
Net charge-offs.... (97) (213) (281) (49) (62) (358)
Loan loss provision.......... 760 1,250 1,000 502 170 80
Allowance acquired in
purchase of branch......... 5
Balance of allowance for loan
losses at end of period.... $ 4,411 $ 3,748 $ 2,711 $ 1,992 $ 1,539 $ 1,426
--------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- --------
Ratio of net charge-offs
during period to average
loans outstanding.......... 0.03% 0.07% 0.13% 0.03% 0.06% 0.43%
--------- -------- -------- -------- -------- --------
--------- -------- -------- -------- -------- --------
</TABLE>

- ---------------
(1) Excludes loans held for sale.

(2) Real estate includes real estate construction loans.

INVESTMENT ACTIVITIES

The Company's securities (investment securities and securities available
for sale) increased by $9.4 million from year end 1995 to June 30, 1996 and by
$416,000 from December 31, 1994 to 1995. The investment portfolio consists
primarily of U.S. Treasury and government agency securities and mortgage-backed
securities. The average maturity of the securities portfolio was 3 years, 1
month at June 30, 1996.

Investment securities are those securities which the Company has the
ability and the intent to hold to maturity. Events which may be reasonably
anticipated are considered when determining the Company's intent to hold
investment securities for the foreseeable future. Investment securities are
carried at cost, adjusted for amortization of premiums and accretions of
discounts. Securities to be held for indefinite periods of time and not intended
to be held to maturity are classified as available for sale and carried at fair
value with any unrealized gains or losses reflected as an adjustment to
shareholders' equity. Securities held for indefinite periods of time include
securities that management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates and/or significant prepayment risks. In November 1995, FASB

41
<PAGE> 43

issued a Special Report permitting a one time opportunity for institutions to
reassess the appropriateness of the designations of all securities. Accordingly,
in December 1995 the Company reclassified all "investment securities" as
"securities available for sale."

At June 30, 1996 and December 31, 1995, all of the Company's securities
were classified as available for sale.

The following table summarizes the amortized cost, gross unrealized gains
and losses and the resulting market value of securities available for sale:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
June 30, 1996:
U.S. Treasury & government agency........ $16,773 $ -- $ (39) $16,734
Mortgage-backed.......................... 11,757 -- (489) 11,268
FHLB stock............................... 4,082 -- -- 4,082
-------- --------- --------- -------
Total............................ $32,612 $ -- $ (528) $32,084
-------- --------- --------- -------
-------- --------- --------- -------
December 31, 1995:
U.S. Treasury & government agency........ $ 6,935 $ 13 $ -- $ 6,948
Mortgage-backed.......................... 12,572 -- (126) 12,446
FHLB stock............................... 3,281 -- -- 3,281
-------- --------- --------- -------
Total............................ $22,788 $ 13 $ (126) $22,675
-------- --------- --------- -------
-------- --------- --------- -------
December 31, 1994:
Mortgage-backed.......................... $ 3,079 $ -- $ (361) $ 2,718
-------- --------- --------- -------
-------- --------- --------- -------
December 31, 1993:
Mortgage-backed.......................... $ 3,621 $ -- $ (32) $ 3,589
-------- --------- --------- -------
-------- --------- --------- -------
</TABLE>

At June 30, 1996 and December 31, 1995, the Company had no securities held
for investment purposes. The following table summarizes the recorded value,
gross unrealized gains and losses and the resulting market value of investment
securities as of December 31, 1994 and December 31, 1993:

<TABLE>
<CAPTION>
GROSS GROSS
RECORDED UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
December 31, 1994:
U.S. Treasury............................. $ 1,003 $ -- $ (17) $ 986
Mortgage-backed........................... 16,389 -- (863) 15,526
FHLB stock and other...................... 2,149 -- -- 2,149
------- --------- --------- -------
Total............................. $19,541 $ -- $ (880) $18,661
------- --------- --------- -------
------- --------- --------- -------
December 31, 1993:
U.S. Treasury............................. $ 1,009 $ -- $ -- $ 1,009
Mortgage-backed........................... 19,038 70 (12) 19,096
FHLB stock and other...................... 1,883 -- -- 1,883
------- --------- --------- -------
Total............................. $21,930 $ 70 $ (12) $21,988
------- --------- --------- -------
------- --------- --------- -------
</TABLE>

42
<PAGE> 44

The following table summarizes the recorded and market values of securities
available for sale at June 30, 1996 by contractual maturity groups:

<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
RECORDED MARKET
VALUE VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Amount maturing:
Within one year............................................... $ 1,962 $ 1,960
Greater than one year and less than five years................ 22,765 22,321
Greater than five years and less than ten years............... 2,024 1,931
After ten years............................................... 5,861 5,872

------
--------
Total................................................. $32,612 $ 32,084

------
--------

------
--------
</TABLE>

The following table provides the market values, maturities and weighted
average yields of the Company's "available for sale" portfolio at June 30, 1996:

<TABLE>
<CAPTION>
MATURING
---------------------------------------------------------
WITHIN 1 1-5 5-10 AFTER 10
YEAR YEARS YEARS YEARS TOTAL
-------- ----------- ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury
Balance............................. $1,960 $12,984 -- -- $14,944
Weighted average yield.............. 5.27% 5.86% -- -- 5.78%
U.S. government agency
Balance............................. -- -- -- $1,790 1,790
Weighted average yield.............. -- -- -- 6.55% 6.55%
Mortgage-backed(1)
Balance............................. -- 9,337 $ 1,931 -- 11,268
Weighted average yield.............. -- 5.34% 6.27% -- 5.50%
FHLB stock and other(2)
Balance............................. -- -- -- 4,082 4,082
Weighted average yield.............. -- -- -- 7.61% 7.61%
Total
Balance............................. $1,960 $22,321 $ 1,931 $5,872 $32,084
Weighted average yield.............. 5.27% 5.64% 6.27% 7.29% 5.96%
</TABLE>

- ---------------
(1) The maturities reported for mortgage-backed securities are based on
contractual maturities and therefore do not reflect principal amortization
or assumed prepayments.

(2) The weighted average yield on FHLB stock is based upon the dividend yield
and average balances for the six months ended June 30, 1996.

The Company does not engage in, nor does it presently intend to engage in,
securities trading activities and therefore does not maintain a trading account.

At June 30, 1996 and December 31, 1995 there were no securities of any
issuer (other than governmental agencies) that exceeded 10% of the Company's
shareholders' equity.

SOURCES OF FUNDS

Deposit Activities

The Company's products include a wide variety of transaction accounts,
savings accounts and certificates of deposit. The Company is continuing to
expand the deposit products that it offers. The Company introduced "Columbia
Free Checking," which includes no monthly fees, no minimum balance, no per check
charges, free use of any ATM in Washington, and, upon approval, a

43
<PAGE> 45

personalized no fee Visa(R) debit card. To fund the growth of the Company,
management's strategy has been to make use of brokered and other wholesale
deposits while working to build core deposits as rapidly as possible through the
Company's development of commercial banking relationships and its branch office
network. The Company's use of brokered and other wholesale deposits has
decreased since year end 1993, though management anticipates continued, and
perhaps increasing, use of such deposits to fund increasing loan demand.
However, management anticipates use of brokered deposits will decrease over time
as a percent of total deposits. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Sources of
Funds."

The following table sets forth for the periods indicated the average
balances outstanding and weighted average interest rates for each major category
of deposits:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------------- ---------------------------------------
1996 1995 1995 1994
------------------ ------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE
AVERAGE RATE AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE PAID(2) BALANCE PAID(2) BALANCE PAID BALANCE PAID
-------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing demand and money
market accounts.................... $131,362 3.68% $ 62,587 3.72% $ 79,706 3.95% $ 38,962 2.09%
Savings accounts.................... 21,554 2.80 26,726 2.68 24,547 2.73 33,938 2.64
Certificates of deposit............. 171,410 5.71 164,970 5.48 168,351 5.68 122,198 4.58
-------- ----- -------- ----- -------- ----- -------- -----
Total interest-bearing
deposits...................... 324,326 4.70% 254,283 4.75% 272,604 4.91% 195,098 3.74%
----- ----- ----- -----
----- ----- ----- -----
Demand and other noninterest-bearing
deposits.......................... 53,673 37,687 42,167 26,238
-------- -------- -------- --------
-------- -------- -------- --------
Total deposits.............. $377,999 $291,970 $314,771 $221,336
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1993 1992 1991
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE(1) RATE PAID BALANCE(1) RATE PAID BALANCE(1) RATE PAID
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing demand and money market
accounts.............................. $ 18,090 2.04% $ 12,976 3.62% $ 9,806 4.82%
Savings accounts........................ 29,743 3.49 25,087 4.22 16,518 4.90
Certificates of deposit................. 75,682 4.57 57,072 5.84 51,346 7.44
--------- ------ --------- ------ --------- ------
Total interest-bearing deposits..... 123,515 3.94% 95,135 5.11% 77,670 6.57%
------ ------ ------
------ ------ ------
Demand and other noninterest-bearing
deposits.............................. 10,621 3,416 328
--------- -------- --------
Total deposits.................. $134,136 $ 98,551 $ 77,998
--------- -------- --------
--------- -------- --------
</TABLE>

- ---------------
(1) Average balances were calculated as the average of month-end balances.

(2) Six-month data presented on an annualized basis.

The following table shows the amount and maturity of certificates of
deposit that had balances of more than $100,000 on the specified dates:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Remaining maturity:
Three months or less................ $29,341 $21,319 $24,555 $14,040 $ 5,965 $ 6,245 $ 4,826
Over three through six months....... 13,456 9,690 14,281 9,043 2,799 912 724
Over six through twelve months...... 12,750 18,900 14,742 16,787 3,488 2,216 1,809
Over twelve months.................. 7,834 6,814 5,428 4,706 5,194 1,057 200
------- ------- ------- ------- ------- ------- -------
Total......................... $63,381 $56,723 $59,006 $44,576 $17,446 $10,430 $ 7,559
------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- -------
</TABLE>

44
<PAGE> 46

Borrowings

The Company relies on advances from the FHLB to supplement its funding
sources. The FHLB has served as the Company's primary source of long-term
borrowings. The Company is authorized to apply for advances on the security of
its FHLB stock and certain of its loans and other assets (principally one- to
four-family residential loans and securities that are obligations of, or
guaranteed by, the U.S. Government). FHLB advances are made pursuant to several
different credit programs. Each credit program has its own interest rates and
range of maturities. Depending on the particular program limitations, the
amounts of the advances are generally based on the FHLB's assessment of the
institution's creditworthiness. At June 30, 1996, the Company had total advances
of $37.0 million at interest rates ranging from 4.74% to 6.90%. The weighted
average interest rate on such advances was 5.42%.

On June 3, 1996, the Company gave notice of its intent to redeem all of its
issued and outstanding 7.85% Convertible Subordinated Notes on August 1, 1996.
Prior to August 1, 1996, all of the Notes were converted into 223,743 shares of
Common Stock.

COMPETITION

The Company's strategy involves the significant expansion of Columbia Bank
throughout the Tacoma metropolitan area and contiguous parts of the Puget Sound
region of Washington. During the past several years, substantial consolidation
among financial institutions in Washington has occurred. Due in part to recent
federal legislation concerning interstate banking, the Company anticipates a
continuation of the consolidation trend in Washington. Legislation has recently
been passed by the Washington legislature (effective June 1996) that allows,
subject to certain conditions, mergers or other combinations, relocations of a
bank's main office and branching across state lines in advance of the June 1,
1997 date established by federal law (see "Supervision and Regulation -- Other
Regulatory Developments"). Many other financial institutions, most of which have
greater resources than the Company, compete with the Company for banking
business in the Company's market area. Among the advantages of some of these
institutions are their ability to make larger loans, finance extensive
advertising campaigns, access international money markets and allocate their
investment assets to regions of highest yield and demand. The Company does not
have a significant market share of the deposit-taking or lending activities in
the areas in which it conducts operations. Although the Company has been able to
compete effectively in its market areas to date, there can be no assurance that
it will be able to continue to do so in the future.

PROPERTIES

The Company's executive offices and the main office of Columbia Bank are
located in approximately 37,500 square feet of newly renovated lease space in
downtown Tacoma. The lease has an initial lease term of seven years, with an
expiration of August 2000. The lease agreement provides for one renewal option
for three years and two additional renewal options for five years each. As of
September 30, 1996, Columbia Bank had 10 offices in Pierce County, including the
main office, of which six are leased and four owned (with one owned office
building being situated on leased land). Columbia Bank also has two offices in
Longview (both owned), one office in Bellevue (leased), one office in Federal
Way (leased) and one office in Woodland (owned).

LEGAL PROCEEDINGS

In the ordinary course of business, various claims and lawsuits are brought
against the Company, such as claims to enforce liens, condemnation proceedings
on properties in which the Company holds security interests, claims involving
the making and servicing of real property loans and other issues incident to
Columbia's business. In the opinion of the Company's management and outside
legal counsel, the ultimate liability, if any, resulting from such claims or
lawsuits will not be material to the Company.

45
<PAGE> 47

EMPLOYEES

At June 30, 1996, the Company had 218 full-time equivalent employees. None
of the Company's employees are covered by a collective bargaining agreement with
the Company and management believes that its relationship with its employees is
satisfactory.

SUPERVISION AND REGULATION

The Company and Columbia Bank are subject to extensive federal and
Washington state legislation, regulation and supervision. These laws and
regulations are primarily intended to protect depositors and the FDIC rather
than shareholders of the Company. The laws and regulations affecting banks and
bank holding companies have changed significantly over recent years, and there
is reason to expect that similar changes will continue in the future. Any change
in applicable laws, regulations or regulatory policies may have a material
effect on the business, operations and prospects of the Company. The Company is
unable to predict the nature or the extent of the effects on its business and
earnings that any fiscal or monetary policies or new federal or state
legislation may have in the future. The following information is qualified in
its entirety by reference to the particular statutory and regulatory provisions
described herein.

THE COMPANY

The Company is subject to regulation as a bank holding company within the
meaning of the Bank Holding Company Act of 1956 (the "BHCA"), as amended. As
such, the Company is supervised by the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board" or the "Board").

The Federal Reserve Board has the authority to order bank holding companies
to cease and desist from unsound practices and violations of conditions imposed
by the Board. The Federal Reserve Board is also empowered to assess civil money
penalties against companies and individuals who violate the BHCA or orders or
regulations thereunder in amounts up to $1.0 million per day or order
termination of non-banking activities of non-banking subsidiaries of bank
holding companies, and to order termination of ownership and control of a
non-banking subsidiary by a bank holding company. Certain violations may also
result in criminal penalties. The FDIC is authorized to exercise comparable
authority under the Federal Deposit Insurance Act and other statutes with
respect to state nonmember banks such as Columbia Bank.

The Federal Reserve Board takes the position that a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Board's position that in serving as a source of
strength to its subsidiary banks, bank holding companies should be prepared to
use available resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity and should maintain the
financial flexibility and capital raising capacity to obtain additional
resources for assisting its subsidiary banks. A bank holding company's failure
to meet its obligations to serve as a source of strength to its subsidiary banks
will generally be considered by the Board to be an unsafe and unsound banking
practice or a violation of the Board's regulations or both. The Federal Deposit
Insurance Act requires an undercapitalized institution to submit to the Federal
Reserve Board a capital restoration plan with a guarantee by each company having
control of the bank's compliance with the plan.

The BHCA prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of any company which is not a
bank or from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows a bank holding company to acquire an interest in companies
whose activities are found by the Federal Reserve Board, by order or by
regulation, to be so closely related to banking or

46
<PAGE> 48

managing or controlling banks as to be a proper incident thereto. The Company
must obtain the approval of the Federal Reserve Board before it acquires all, or
substantially all, of any bank, or ownership or control of more than 5 percent
of the voting shares of a bank.

The Company is required under the BHCA to file an annual report and
periodic reports with the Federal Reserve Board and such additional information
as the Federal Reserve Board may require pursuant to the BHCA. The Board may
examine a bank holding company and any of its subsidiaries and charge the
company for the cost of such an examination.

The Company and any subsidiaries which it may control are deemed
"affiliates" within the meaning of the Federal Reserve Act, and transactions
between bank subsidiaries of the Company and its affiliates are subject to
certain restrictions. With certain exceptions, the Company and its subsidiaries
are prohibited from tying the provision of certain services, such as extensions
of credit, to other services offered by the Company or its affiliates.

Banking regulations require bank holding companies and banks to maintain a
minimum "leverage" ratio of core capital to adjusted quarterly average total
assets of at least 3%. In addition, banking regulators have adopted risk-based
capital guidelines under which risk percentages are assigned to various
categories of assets and off-balance sheet items to calculate a risk-adjusted
capital ratio. Tier I capital generally consists of common shareholders' equity
(which does not include unrealized gains and losses on securities), less
goodwill and certain identifiable intangible assets, while Tier II capital
includes the allowance for loan losses and subordinated debt, both subject to
certain limitations. Regulatory risk-based capital guidelines require Tier I
capital of 4% of risk-adjusted assets and minimum total capital ratio (combined
Tier I and Tier II) of 8%. At June 30, 1996, the Company's leverage ratio was
7.30% compared with 7.72% at December 31, 1995. The Company's Tier I and total
capital ratios were 8.58% and 10.30%, respectively, at June 30, 1996, compared
with 9.10% and 10.95%, respectively, at December 31, 1995. For a discussion of
Columbia Bank's capital ratios, see "-- Banking Subsidiary."

BANKING SUBSIDIARY

Columbia Bank is a Washington state-chartered commercial bank, the deposits
of which are insured by the FDIC. It is subject to regulation by the FDIC and
the Washington Department of Financial Institutions, Division of Banks (the
"Division"). Although Columbia Bank is not a member of the Federal Reserve
System, the Federal Reserve Board supervisory authority over the Company can
also affect Columbia Bank.

Among other things, applicable federal and state statutes and regulations
which govern a bank's operations relate to minimum capital requirements,
required reserves against deposits, investments, loans, legal lending limits,
mergers and consolidations, borrowings, issuance of securities, payment of
dividends, establishment of branches and other aspects of its operations. The
Division and the FDIC also have authority to prohibit banks under their
supervision from engaging in what they consider to be unsafe and unsound
practices.

Columbia Bank is required to file periodic reports with the FDIC and the
Division and is subject to periodic examinations and evaluations by those
regulatory authorities. Based upon such an evaluation, the regulators may
revalue the assets of an institution and require that it establish specific
reserves to compensate for the differences between the regulator-determined
value and the book value of such assets. These examinations must be conducted
every 12 months, except that certain well-capitalized banks may be examined
every 18 months. The FDIC and the Division may each accept the results of an
examination by the other in lieu of conducting an independent examination.

As a subsidiary of a bank holding company, Columbia Bank is subject to
certain restrictions in its dealings with the Company and with other companies
that may become affiliated with the Company.

Columbia Bank's deposits are insured by the FDIC through the BIF and SAIF.
Approximately 39% of the Company's deposits are deemed to be SAIF-insured under
an allocation formula that

47
<PAGE> 49

applies because certain deposits were previously acquired from a savings bank in
a so-called Oakar transaction. See "Business -- General." The FDIC's current
annual assessment rate for deposits range from 0.0% to 0.27% of insured deposits
for the BIF and 0.23% to 0.31% of insured deposits for the SAIF. Legislation was
recently enacted to resolve the difference in rates between the two funds.
Pursuant to this legislation, the FDIC has proposed to lower SAIF assessment
rates from their current rates to a range of 0.04% to 0.31% and then through
application of an adjustment factor to further reduce SAIF assessment rates to
an effective range of 0.0% to 0.27%. The FDIC has also proposed to maintain an
assessment rate of between 0.0% and 0.27% of covered deposits for BIF members.
These rates would become effective January 1, 1997. Further, the FDIC has
proposed that such rate schedule be effective for certain institutions, such as
Columbia Bank, for the period of October 1, 1996 until December 31, 1996. Any
overpayment of fourth quarter assessments, estimated at 0.0575% for certain
banks, such as Columbia Bank, will be refunded or credited with interest. The
legislation also requires a special assessment on SAIF-insured deposits held by
the institution at March 31, 1995, with a discount of 20% on the special
assessment and subsequent assessments for Oakar institutions, such as Columbia
Bank, which meet certain tests. The FDIC has estimated that the special
assessment rate will be approximately 0.657% of covered deposits. Moreover, the
legislation requires assessments on both SAIF and BIF members in order to
service bonds issued in connection with the government resolution of the savings
and loan crisis. The FDIC has estimated that for the next three years beginning
on January 1, 1997 through December 31, 1999, an annual assessment of
approximately 0.064% of covered deposits and 0.013% of covered deposits will be
assessed upon SAIF- and BIF-insured deposits, respectively, and from January 1,
2000 through December 31, 2017, the assessment rate will be 0.024% of covered
deposits for all insured institutions. If the deposit insurance funds are merged
on January 1, 1999 pursuant to the legislation, then the uniform assessment rate
to service the bonds will apply from that date forward. At September 30, 1996,
approximately $156.0 million of Columbia Bank's deposits were deemed to be
SAIF-insured under the allocation formula. The actual deposits at that date
remaining from the Oakar transaction were approximately $23.0 million.

Dividends paid by Columbia Bank will provide substantially all of the
Company's cash flow. Applicable federal and Washington state regulations
restrict capital distributions by institutions such as Columbia Bank, including
dividends. Such restrictions are tied to the institution's capital levels after
giving effect to such distributions. At June 30, 1996, Columbia Bank's leverage
ratio was 8.12% compared with 7.99% at December 31, 1995. Tier I and total
capital ratios for Columbia Bank at June 30, 1996 were 9.56% and 10.68%,
respectively, compared with 9.54% and 10.63%, respectively, at December 31,
1995. The FDIC has established the qualifications necessary to be classified as
a "well-capitalized" bank, primarily for assignment of FDIC risk-based insurance
assessment rates beginning in 1993. To qualify as "well-capitalized", banks must
have a Tier I risk-adjusted capital ratio of at least 6%, a total risk-adjusted
capital ratio of at least 10%, and a leverage ratio of at least 5%. Columbia
Bank qualified at "well-capitalized" at June 30, 1996.

Federal laws generally bar institutions which are not well-capitalized from
accepting brokered deposits. The FDIC has issued rules which prohibit
under-capitalized institutions from soliciting or accepting such deposits.
Adequately capitalized institutions are allowed to solicit such deposits, but
only to accept them if a waiver is obtained from the FDIC.

OTHER REGULATORY DEVELOPMENTS

Congress has enacted significant federal banking legislation in recent
years. Included in this legislation have been the Financial Institution Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA, among other
things, (i) created two deposit insurance funds administered by the FDIC; (ii)
permitted commercial banks that meet certain housing-related asset requirements
to secure advances and other financial services from local Federal Home Loan
Banks; (iii) restructured the

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<PAGE> 50

federal regulatory agencies for savings associations; and (iv) greatly enhanced
the regulators' enforcement powers over financial institutions and their
affiliates.

FDICIA went substantially farther than FIRREA in establishing a more
rigorous regulatory environment. Under FDICIA, regulatory authorities are
required to enact a number of new regulations, substantially all of which are
now effective. These regulations include, among other things, (i) a new method
for calculating deposit insurance assessments based on risk, (ii) restrictions
on acceptance of brokered deposits except by well-capitalized institutions,
(iii) additional limitations on loans to executive officers and directors of
banks, (iv) the employment of interest rate risk in the calculation of
risk-based capital, (v) safety and soundness standards that take into
consideration, among other things, management, operations, asset quality,
earnings and compensation, (vi) a five-tiered rating system from
well-capitalized to critically undercapitalized, along with the prompt
corrective action the agencies may take depending on the category, and (vii) new
disclosure and advertising requirements with respect to interest paid on savings
accounts.

FDICIA and regulations adopted by the FDIC impose additional requirements
for annual independent audits and reporting when a bank begins a fiscal year
with assets of $500 million or more. Such banks, or their holding companies, are
also required to establish audit committees consisting of directors who are
independent of management. The Company had less than $500 million in assets at
January 1, 1996, but it currently has an Audit Committee of independent
directors and it meets the audited financial statement requirements of
applicable regulations. Columbia Bank will become subject to additional
reporting requirements and will incur additional compliance expense when it
becomes subject to the FDIC regulation.

Also, the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Interstate Banking Act") provides banks with greater opportunities to
merge with other institutions and to open branches nationwide. The Interstate
Banking Act also allows a bank holding company whose principal operations are in
one state to apply to the Federal Reserve for approval to acquire a bank that is
headquartered in a different state. States cannot "opt out" but may impose
minimum time periods, not to exceed five years, for the target bank's existence.

The Interstate Banking Act also allows bank subsidiaries of bank holding
companies to establish "agency" relationships with their depository institution
affiliates. In an agency relationship, a bank can accept deposits, renew time
deposits, close and service loans, and receive payments for a depository
institution affiliate. States cannot "opt out."

In addition, the Interstate Banking Act allows banks whose principal
operations are located in different states to apply to federal regulators to
merge. This provision takes effect June 1, 1997, unless states enact laws to
either (i) authorize such transactions at an earlier date or (ii) prohibit such
transactions entirely. The Interstate Banking Act also allows banks to apply to
establish de novo branches in states in which they do not already have a branch
office. This provision takes effect June 1, 1997, but (i) states must enact laws
to permit such branching and (ii) a bank's primary federal regulator must
approve any such branch establishment. The Washington legislature passed
legislation that allows, subject to certain conditions, mergers or other
combinations, relocations of banks' main office and branching across state lines
in advance of the June 1, 1997 date established by federal law.

Further effects on the Company may result from the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Community Development
Act"). The Community Development Act (i) establishes and funds institutions that
are focused on investing in economically distressed areas and (ii) streamlines
the procedures for certain transactions by financial institutions with federal
banking agencies.

Among other things, the Community Development Act requires the federal
banking agencies to (i) consider the burdens that are imposed on financial
institutions when new regulations are issued or new compliance burdens are
created and (ii) coordinate their examinations of financial

49
<PAGE> 51

institutions when more than one agency is involved. The Community Development
Act also streamlines the procedures for forming certain one-bank holding
companies and engaging in authorized non-banking activities.

In addition to the changes to the BIF and SAIF assessment rates implemented
by the legislation which was recently passed as part of the 1996 Omnibus
spending bill (see "Recent Developments"), various regulatory relief provisions
were enacted. The new legislation includes, among other things, changes to (i)
the Truth in Lending Act and the Real Estate Settlement Procedures Act to
coordinate and simplify the two laws' disclosure requirements; (ii) eliminate
civil liability for violations of the Truth in Savings Act after five years; and
(iii) streamline the application process for a number of bank holding company
and bank applications; (iv) establish a privilege from discovery in any civil or
administrative proceeding or bank examination for any fair lending self-test
results conducted by, or on behalf of, a financial institution in certain
circumstances; (v) repeal the FDICIA requirement that independent public
accountants attest to compliance with designated safety and soundness
regulations; (vi) impose a continuous regulatory review of regulations to
identify and eliminate outdated and unnecessary rules; and (vii) various other
miscellaneous provisions to reduce bank regulatory burden.

TAXATION

NET OPERATING LOSS AND TAX CREDIT CARRYFORWARDS

At June 30, 1996 and December 31, 1995, for federal income tax purposes,
the Company had net operating loss ("NOL") carryforwards of $2.2 million and
$4.4 million, respectively. The carryforwards may be used, subject to certain
restrictions and limitations, to offset taxable income and the tax liability of
the Company. If there is no taxable income or tax liability, the carryforwards
will not be utilized. In addition, the carryforwards will expire if they are not
utilized within a specified period.

Certain provisions of the Code, impose limitations on the amount of the
carryforwards which may be utilized annually after an "ownership change," as
defined in the Code. Where the annual limitations apply, their effect on the
carryforwards is dependent upon, among other factors, the "value" (for purposes
of these limitations) of a corporation at the time of the ownership change.

The 1990 Acquisition, the sale of Common Stock in June 1992 and the sale of
Common Stock in August 1993 each constituted an "ownership change" within the
meaning of the Code and resulted in the application of an annual limitation on
utilization of the Company's carryforwards. The Company does not believe that
the reduction of the annual limitation as a result of the above named events
would be material for financial statement purposes.

At June 30, 1996, the Company had alternative minimum tax, investment and
rehabilitation tax credit carryforwards of approximately $673,000, of which
$581,000 expires in 1997, $14,000 expires in 1999, and the remainder in 2010.
However, because of annual limitations on the utilization of net operating loss
carryforwards and because the Code requires that net operating loss
carryforwards be utilized before tax credit carryforwards, the Company may not
receive an income tax benefit from the tax credit carryforwards, which may
expire unused.

The applicable provisions of the law regarding these limitations are
complex, and definitive interpretations of all aspects of the law and its
application to all factual situations do not exist. There can be no assurance
that the Internal Revenue Service (the "IRS") will not challenge the Company s
treatment of the carryforwards, or that such treatment, if challenged, will be
upheld. If successful, such challenge could result in a reduction in the
limitation. However, the Company does not anticipate that a challenge by the IRS
would result in a material reduction for financial statement purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes to Consolidated Financial Statements.

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<PAGE> 52

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information with respect to the
directors and executive officers of the Company. All directors hold office until
the next annual meeting of shareholders of the Company or until their successors
are elected and qualified. Executive officers are elected generally to serve at
the discretion of the Company's Board of Directors.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------- --- --------------------------------------------------------
<S> <C> <C>
A.G. Espe................... 59 Director, Chairman of the Board and Chief Executive
Officer of the Company; Chairman of the Board of
Columbia Bank
W.W. Philip................. 70 Director, President and Chief Operating Officer of the
Company; President and Chief Executive Officer of
Columbia Bank
Donald A. Andersen.......... 51 Senior Vice President, Senior Credit Administrator of
Columbia Bank
Julie A. Healy.............. 41 Senior Vice President, Operations Manager of Columbia
Bank
H.R. Russell................ 42 Senior Vice President, Senior Loan Production Officer of
Columbia Bank
Gary R. Schminkey........... 39 Senior Vice President, Chief Financial Officer of the
Company and Columbia Bank
Evans Q. Whitney............ 53 Senior Vice President, Human Resources Director of the
Company and Columbia Bank
W. Barry Connoley........... 54 Director(1)
Richard S. DeVine........... 69 Director(2)
Jack Fabulich............... 68 Director(1)
Jonathan Fine............... 42 Director(1)
Margel S. Gallagher......... 48 Director(2)
John A. Halleran............ 67 Director(2)
John H. Powell.............. 72 Director(2)
Robert E. Quoidbach......... 71 Director(1)
Donald Rodman............... 58 Director(1)
Frank H. Russell............ 66 Director(2)
Sidney R. Snyder............ 70 Director(1)
James M. Will, Jr........... 50 Director(1)
</TABLE>

- ---------------
(1) Serves as a member of the Audit Committee.

(2) Serves as a member of the Personnel and Compensation Committee.

From January 1995 through June 1996, directors of the Company received an
annual retainer of $1,600 in addition to fees of $100 for each Board and
Committee meeting attended. Commencing July 1996, director compensation was
amended to provide for an annual retainer of $1,600 and fees of $200 for each
Board meeting attended and $150 for each Committee meeting attended.

The business experience of each of the directors and executive officers
during the last five years is set forth below. The following also sets forth the
term of service of each executive officer at, and the year each director first
became a director of, (i) the Company; (ii) its predecessor corporation;

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<PAGE> 53

(iii) its former subsidiary, Savings Bank (which was merged into Columbia Bank
in 1994); or (iv) its current subsidiary, Columbia Bank.

A.G. Espe has been Chairman of the Board of the Company since September
1990 and Chief Executive Officer of the Company since March 1993. Mr. Espe, who
is also Chairman of the Board of Columbia Bank and of Northrim Bank, has
extensive banking and business experience. From 1985 to 1989, Mr. Espe served as
Chairman of the Board, President and Chief Executive Officer of Key Pacific
Bancorp. See "Prospectus Summary."

W.W. Philip has been a director of the Company since July 1993. He became
President and Chief Operating Officer of the Company and President and Chief
Executive Officer of Columbia Bank in August 1993 when the Company's
reorganization was completed and the Company began operations in Tacoma. Until
his retirement in December 1992, Mr. Philip was Chairman of the Board and Chief
Executive Officer of Puget Sound Bancorp ("PSB") since its inception in 1981 and
was Chairman of the Board and Chief Executive Officer of Puget Sound National
Bank prior to and after the inception of PSB, having served with that
institution for more than 40 years. See "Prospectus Summary -- The Company."

Donald A. Andersen joined Columbia Bank as Senior Vice
President -- Commercial Loans in January 1995. Mr. Andersen was employed by
Puget Sound National Bank and its successor institution for nearly 25 years,
having served as Vice President -- Commercial Loan Officer from 1991 to 1995.

Julie A. Healy joined Columbia Bank as Senior Vice President -- Operations
in June 1993. Ms. Healy was employed by Puget Sound National Bank for nearly 12
years, having served as Vice President -- Operations from 1991 to 1993.

H.R. Russell joined Columbia Bank as Senior Vice President -- Commercial
Loans in October 1993. Mr. Russell was employed by Puget Sound National Bank and
its successor institution for nearly 14 years, having served as Vice
President -- Commercial Loan Officer from 1991 to 1993.

Gary R. Schminkey joined Columbia Bank as Vice President and Controller in
March 1993. He was appointed Senior Vice President -- Chief Financial Officer of
Columbia Bank and the Company in 1994. Mr. Schminkey was employed by PSB, Puget
Sound National Bank and its successor institution for nearly 10 years, having
served from 1991 to 1993 as Assistant Vice President -- Assistant Controller for
PSB and during that same period as Vice President -- Accounting and Finance for
Puget Sound National Bank and its successor institution.

Evans Q. Whitney joined Columbia Bank as Senior Vice President -- Human
Resources in March 1993. Mr. Whitney is also the Senior Vice President -- Human
Resources of the Company. Mr. Whitney was employed by PSB and Puget Sound
National Bank for nearly 27 years, having served as Senior Vice
President -- Human Resources for PSB and Puget Sound National Bank from 1991 to
1993.

W. Barry Connoley has been a director since 1993. Since 1986, Mr. Connoley
has been President and Chief Executive Officer of MultiCare Medical Center,
Tacoma, Washington.

Richard S. DeVine has been a director since 1993. Since 1992, Mr. DeVine
has served as President of Chinook Resources, Inc. (timber acquisition and
sales). Mr. DeVine currently serves as Chairman of Raleigh Schwarz & Powell,
Inc. (insurance brokers), Tacoma, Washington, having served as President of that
company from 1976 to 1990.

Jack Fabulich has served as a director since 1993. He currently is Chairman
of Parker Paint Manufacturing Co., Inc., Tacoma, Washington, having served as
President from 1982 to 1993. Since 1976, he has also served as Commissioner of
the Port of Tacoma.

Jonathan Fine has been a director since 1993. From 1986 until December
1992, Mr. Fine served as Senior Vice President and Treasurer of PSB. From
January 1993 until April 1996 Mr. Fine was a

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<PAGE> 54

private investor. Mr. Fine is currently the Chief Operating Officer of the
American Red Cross, Seattle -- King County Chapter.

Margel S. Gallagher has served as a director since 1993. Since 1982 she has
served as President of Viva Imports, Ltd., (retail women's clothing), Tacoma and
Seattle, Washington.

John A. Halleran has served as a director since 1992. During the past five
years, Mr. Halleran, who is retired, has been a private investor. Prior to that
time he was a general contractor with headquarters in Bellevue, Washington.

John H. Powell has been a director since 1991. Since 1950, Mr. Powell has
been the co-owner of Sound Oil Company, a heating oil dealer in Bellevue,
Washington. He is also a director of NorCap, L.L.C. Mr. Powell was Chairman of
the Board of Bank of Seattle, Seattle, Washington, from 1976 to 1983.

Robert E. Quoidbach has served as a director since 1988. Since 1990 Mr.
Quoidbach, who is retired, has been a private investor and tree farmer. Prior to
that time he was an industrial contractor in Longview, Washington.

Donald Rodman has served as a director since 1991. Since 1961, he has been
the owner and an executive officer of Rodman Realty, Inc., Longview, Washington.

Frank H. Russell has served as a director since 1993. Since 1985, he has
been President of Professional Services Unified, Inc., a full-facility service,
including food service, janitorial and electronic access systems in Tacoma,
Washington. Mr. Russell is also the President of Quality Meal Expeditors (food
catering) headquartered in Tacoma, Washington.

Sidney R. Snyder has been a director since 1988. He also served as a
director of the Savings Bank from 1988 until April 1994. Mr. Snyder has been the
owner of Sid's Food Market in Seaview, Washington since 1953 and of Midtown
Market in Long Beach, Washington since 1982. Mr. Snyder is the Chairman of the
Board and a principal shareholder of Bank of the Pacific in Long Beach,
Washington. Mr. Snyder has been a member of the Washington State Senate since
1990, currently serving as Senate Majority Leader.

James M. Will, Jr. has served as a director since 1993. Since 1969, he has
served as President of TAM Manufacturing Co., Tacoma, Washington.

EXECUTIVE COMPENSATION

The following table sets forth the aggregate compensation for services
rendered to the Company or its subsidiaries in all capacities paid or accrued
for the fiscal years ended December 31, 1995, December 31, 1994 and December 31,
1993, to each person serving as an executive officer of the Company whose
aggregate cash and cash equivalent forms of compensation exceeded $100,000 (the
"Named Executive Officers").

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<PAGE> 55

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------------- ---------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION(2)
- ---------------------------- ---- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
A.G. Espe, Chairman and
Chief Executive Officer... 1995 $168,623(1) $50,000 $ -- $25,995
1994 165,000 -- -- 18,715
1993 137,500 15,625 18,700 20,673
W.W. Philip, President and
Chief Operating Officer... --(3) --(3) -- --
</TABLE>

- ---------------
(1) Represents total cash compensation earned, including amounts deferred under
a Supplemental Executive Retirement Plan.

(2) Includes $11,900 in contributions to 401(k) savings plan and a 3% match of
Mr. Espe's 1995 deferral under the plan; also includes $14,095 paid in 1995
as premium for life insurance payable to Mr. Espe's estate and $11,845 paid
in 1994 and 1993 as premiums for such life insurance.

(3) Payment of salary and bonus compensation to Mr. Philip is subject to
attainment of certain performance criteria, except, as provided by contract,
in the event of early termination. See "Long-Term Incentive Plan Awards" and
"Employment and Change of Control Agreements."

OPTION GRANTS/AWARDS

The Company's Employee Stock Option Plan (the "Plan") authorizes the grant
of options to purchase up to 315,000 shares of Common Stock in aggregate to
eligible employees. At June 30, 1996, options to purchase 293,393 shares at
prices ranging from $3.81 to $15.25 per share were outstanding.

No grant of options under the Plan was made to the Named Executive Officers
during the period from the Company's reorganization in 1993 until August 1996.
In lieu of the grant of stock options to either Mr. Espe or Mr. Philip in
September 1993, when options were granted to numerous new senior personnel, the
Personnel and Compensation Committee determined to give each of them the right
to acquire 30,000 shares of Common Stock by purchase at the then fair market
value of $12.00 per share, with the assistance of a fixed-rate loan in the full
principal amount of the purchase. The loan is due on or before March 1, 2000.
Both Mr. Espe and Mr. Philip elected to make such purchases, thus becoming
owners of the stock, rather than becoming holders of option interests, and are
personally liable for repayment of the sums represented by the loan.

In August 1996, the Personnel and Compensation Committee of the Board of
Directors of the Company approved the grant to Mr. Espe of an option to purchase
40,000 shares of Common Stock at prices ranging from $15.25 to $21.25. The Board
also approved the grant to Mr. Philip of a restricted stock award for 20,000
shares of Common Stock. The market value of the Common Stock at the date of
grant to Mr. Philip was $15.25 per share.

The option to Mr. Espe, which is subject to approval by shareholders of
additional shares to be available pursuant to the Plan and certain other
amendments to the Plan, provides for 10,000 shares to vest (become exercisable)
in August 1997 at an option price of $15.25, and 10,000 additional shares to
vest each year beginning in August 1998 and continuing through August 2000 at
option prices of $17.25, $19.25 and $21.25 respectively. Vested options will
remain exercisable for ten years from the date of vesting in the event of Mr.
Espe's retirement (as approved by the Board), death or disability, or a change
in control of the Company or Columbia Bank (as the term is defined in Mr. Espe's
Employment Agreement).

The restricted stock award to Mr. Philip provides for the immediate
issuance of 20,000 shares of the Company's Common Stock to Mr. Philip in escrow.
The shares are to remain in escrow until Mr. Philip has served as an active
officer or Board member of the Company and/or Columbia Bank for a period of five
years from the date of the grant, unless that term is reduced (i) by action of
the Board or the Personnel and Compensation Committee, (ii) by reason of a
change of control of the Company or Columbia Bank (as defined in Mr. Philip's
employment agreement), or (iii) by

54
<PAGE> 56

Mr. Philip's death or disability. Mr. Philip will have the right to vote the
shares and to receive any dividends or other distributions on the shares while
they remain in escrow.

LONG-TERM INCENTIVE PLAN AWARDS

The following table refers to long-term incentive arrangements that were
entered into with Mr. Espe and Mr. Philip in 1993 and amended, as to Mr. Philip
only, in 1995. Under the arrangements, specific compensation and allowance
payments were agreed to be made in 1996 and 1997 if the Company achieves certain
performance objectives in 1995 and 1996. These objectives are: (1) Growth -- by
June 30, 1995, the Company must have assets, loans and deposits of at least $325
million, $200 million and $230 million, respectively (achieved); (2) Asset
Quality -- at December 31, 1995 and 1996, problem assets of the Company
(excluding those existing at September 1, 1993) must not exceed 1.5% of the
Company's total assets at those dates; and (3) Profitability -- the Company must
achieve net income of at least 50 basis points on average assets for calendar
year 1995, and must achieve net income of at least 75 basis points on average
assets for calendar year 1996. Performance criteria may be waived by the Board
of Directors of the Company in its discretion and amounts may be deemed earned
and payments accelerated in the event of early termination of the executive's
employment agreement or in the event of the executive's death or disability. The
Company has accrued the anticipated expense. See "Employment and Change of
Control Agreements."

<TABLE>
<CAPTION>
PERIOD UNTIL ESTIMATED FUTURE PAYOUT
DOLLAR VALUE MATURATION BASED UPON ACHIEVEMENT
NAME AWARD OF PAYOUT OF PERFORMANCE CRITERIA(1)
- ------------------------------- ------------ ------------------- --------------------------
<S> <C> <C> <C>
A.G. Espe...................... $ 59,400 December 31, 1996 $ 67,413
W.W. Philip.................... 383,000 December 31, 1996 440,824
167,000 Twelve monthly 197,292
payments beginning
January 1, 1997
</TABLE>

- ---------------
(1) If earned, the amounts will bear interest from the date deemed to be earned
(as provided by Agreement) at the two year U.S. Treasury Bill rate at
January 1 each year plus 3%.

OTHER EMPLOYEE BENEFITS

The Company also maintains a defined contribution plan, in the form of a
401(k) plan, that allows employees, including executive officers, to contribute
up to 15% of their compensation each year. The Company currently makes matching
contributions to the extent of 50% of employees' contributions up to 3% of each
employee's total compensation and is authorized to make a discretionary
contribution as determined by the Personnel and Compensation Committee of the
Board of Directors each year. The Company contributed approximately $126,000 in
matching funds to the 401(k) Plan during 1995, and made a discretionary
contribution of approximately $290,000 for the year 1995.

The Company also maintains an Employee Stock Purchase Plan (the "ESPP")
that was adopted in 1995. The ESPP allows eligible employees to purchase shares
of Common Stock at 90% of the then current market price by means of payroll
deductions.

Beginning in 1994, the Company established a discretionary incentive bonus
plan for the benefit of employees. Contributions by the Company are based upon
year-end results of operations for the Company and attainment of goals by
individuals. In 1995 the Company contributed $341,000 to the plan.

The Company also provides a group health insurance plan along with standard
vacation and sick pay benefits.

55
<PAGE> 57

EMPLOYMENT AND CHANGE OF CONTROL AGREEMENTS

Mr. Espe entered into an employment agreement with the Company effective
December 30, 1993. The agreement has a term expiring December 31, 1997. Mr.
Espe's annual salary is $150,000 in 1996, with annual increases thereafter, as
the Board of Directors shall determine. In addition, the Company has agreed to
provide Mr. Espe with a Supplemental Employee Retirement Plan, which will
provide Mr. Espe with a benefit payable after retirement calculated on the basis
of ten percent of his salary being contributed each year, the amount contributed
increasing in value based on an assumed interest rate. At the time of entering
into the agreement, Mr. Espe was offered and purchased 30,000 shares of Common
Stock at $12.00 per share (the then fair market value). In connection with that
transaction, the Company loaned Mr. Espe $360,000 to purchase the shares, with
interest payable annually at six percent per annum and the full principal amount
due on or before March 1, 2000. The principal payment may be accelerated under
certain circumstances. Mr. Espe also receives life and disability benefits, will
be reimbursed for certain reasonable expenses incurred in carrying out his
duties, and may participate in the Company's health and welfare plans available
to the Company's employees generally. Mr. Espe may also receive certain
allowances in the amount of $59,400 plus interest, if certain performance
targets, including growth, asset quality, and profitability, as more fully
discussed under "-- Long-Term Incentive Plan Awards," are met. In the event the
Company terminates the agreement without cause (as defined therein), Mr. Espe
would be entitled to the greater of two years' salary or salary payable for the
remainder of the term of the agreement. The agreement has recently been amended,
effective January 1, 1997, to extend the term of Mr. Espe's employment to
December 31, 2001 and to establish his minimum annual salary at $160,000. Other
terms were changed consistent with the new term of the amended agreement. Both
the agreement and the amended agreement contain a covenant by Mr. Espe not to
compete with the Company in its market area for two years after voluntarily
terminating employment without "good cause" (as defined). The Company is the
beneficiary under a key-person life insurance policy on the life of Mr. Espe in
the amount of $3.5 million.

Mr. Philip also entered into an employment agreement with the Company
effective December 31, 1993, as further amended effective December 29, 1995. The
term of the agreement expires on December 31, 1996. Mr. Philip's salary for the
term of the agreement is $550,000, but payment of this salary is subject to the
attainment of performance targets, including growth, asset quality, and
profitability as more fully discussed under "-- Long-Term Incentive Plan
Awards." If these targets are met, Mr. Philip will receive a lump sum payment of
$383,000, plus interest, on December 31, 1996, and an additional $167,000, plus
interest, during the calendar year 1997. Other provisions of the Agreement with
Mr. Philip are on substantially the same terms as that of Mr. Espe's, described
above. In connection with his employment, Mr. Philip also was offered and
purchased 30,000 shares of Common Stock at $12.00 per share (the then fair
market value). In connection with that transaction, the Company loaned Mr.
Philip $360,000 to purchase the shares, on terms and conditions similar to those
for the loan to Mr. Espe, described above. Mr. Philip's agreement recently has
been amended, effective January 1, 1997 ("amended agreement"), to extend the
term to December 31, 1998 and to establish his minimum annual salary at
$175,000. Other terms were changed consistent with the new term of the amended
agreement. Both the agreement and the amended agreement contain a covenant by
Mr. Philip not to compete with the Company in its market area for two years
after voluntarily terminating employment without "good cause" (as defined
therein). The Company is the beneficiary under a key-person life insurance
policy on the life of Mr. Philip in the amount of $2.0 million.

The employment agreements for both Messrs. Espe and Philip, as now in
effect and as amended effective January 1, 1997, contain provisions that require
payments in the event of a change in control (as defined therein) and
termination of employment without cause (as defined therein) following by up to
two years, and in certain cases preceding, that event. Generally in such
circumstances, all contingent payments payable to each of Messrs. Espe and
Philip are deemed earned. In addition, under the agreements in effect until
January 1, 1997, Mr. Espe is entitled to

56
<PAGE> 58

receive his base salary until three years following such termination, and Mr.
Philip is entitled to receive the sum of $100,000 reduced by certain pro-rated
amounts. Under the terms of their amended agreements, Messrs. Espe and Philip
are entitled to receive their base salary for three and two years, respectively,
following such termination or until the term of their amended agreements,
whichever is longer. In such circumstances, each is also entitled to all
benefits provided for in his amended agreement, to be fully vested as to any
nonvested options, and to have restrictions lapse with regard to any restricted
stock or other restricted securities. In the event either executive receives an
amount under these provisions which result in imposition of a tax on the
executive under the provisions of Internal Revenue Code Section 4999 (relating
to Golden Parachute payments), the Company is obligated to reimburse the
executive for that amount, exclusive of any tax imposed by reason of receipt of
reimbursement under the employment agreement.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding beneficial
ownership of the Common Stock at September 30, 1996 by (i) each director and
Named Executive Officer, (ii) all directors and executive officers as a group,
and (iii) each person known by the Company to be the beneficial owner of more
than 5% of the outstanding shares of Common Stock:

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT OF CLASS
OWNED BEFORE BEFORE THE
NAME AND ADDRESS(1) THE OFFERING(2) OFFERING(2)
------------------------------------------------------ --------------- ----------------
<S> <C> <C>
A.G. Espe............................................. 164,525(3) 4.4%
W.W. Philip........................................... 120,435(4) 3.2%
W. Barry Connoley..................................... 1,050 *
Richard S. DeVine..................................... 22,242 *
Jack Fabulich......................................... 4,375 *
Jonathan Fine......................................... 14,045(5) *
Margel S. Gallagher................................... 61,562(6) 1.8%
John A. Halleran...................................... 9,235 *
John H. Powell........................................ 11,688 *
Robert E. Quoidbach................................... 3,579(7) *
Donald Rodman......................................... 4,853(8) *
Frank H. Russell...................................... 1,512 *
Sidney R. Snyder...................................... 21,000 *
James M. Will, Jr..................................... 1,924 *
All directors and executive officers as a group (19
persons)............................................ 469,640(2) 12.4%
</TABLE>

- ---------------
* Less than one percent.

(1) Unless otherwise noted, the address for all of the named persons is 1102
Broadway Plaza, Tacoma, Washington 98402.

(2) Unless otherwise indicated, represents shares over which each individual
exercises sole voting or investment power. Includes 22,050 shares issuable
to executive officers under options exercisable within 60 days.

(3) Includes 62,753 shares beneficially owned by NorCap, L.L.C. ("NorCap"), a
corporation controlled by Mr. Espe. Also includes 50,175 shares issuable
upon exercise of options granted to NorCap, L.L.C., which options became
exercisable on September 25, 1993 (and until September 26, 2000) at $6.15
per share as to 36,317 shares and $8.81 per share as to 13,858 shares.

(4) Includes 51,184 shares held by Kelcin, a limited partnership in which Mr.
Philip is a general partner. Also includes 20,000 shares issued to Mr.
Philip as a restricted stock award and held in escrow until certain
conditions are met. See "Management -- Options Grants/Awards."

57
<PAGE> 59

(5) Includes 3,908 shares owned by a family trust for which Mr. Fine is
co-trustee and shares voting and investment power.

(6) Includes 3,641 shares held by C&G Partnership, a Washington general
partnership in which Ms. Gallagher's spouse, J. James Gallagher, is a
general partner. Also includes 10,424 shares held by J. James Gallagher &
Company Profit Sharing Trust, for which Ms. Gallagher's spouse, J. James
Gallagher, is the trustee.

(7) All shares are owned by a living trust for which Mr. Quoidbach is the
trustee with sole voting and investment power.

(8) All shares are owned by a living trust for which Mr. Rodman and his spouse
are co-trustees and share voting and investment power.

CERTAIN TRANSACTIONS

TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS

Employment Agreements With Messrs. Espe and Philip. Pursuant to their
respective employment agreements, Columbia agreed to sell to each of Mr. Espe
and Mr. Philip 30,000 shares of Common Stock at $12.00 per share, the fair
market value of the Common Stock on the dates the parties agreed on the terms of
their respective employment agreements. Pursuant to their respective employment
agreements, the Company loaned to each of Mr. Espe and Mr. Philip $360,000 to
purchase such shares. See "Management -- Employment and Change of Control
Agreements."

Loans to Directors and Executive Officers. Certain of the Company's
directors and executive officers and their immediate families are also customers
and depositors of the Company and it is anticipated that such individuals will
continue to be customers of the Company in the future. All transactions between
the Company and the Company's directors, executive officers and their immediate
families were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, and in the opinion of management
did not involve more than the normal risk of collectibility or present other
unfavorable features. At December 31, 1995, loans to directors and executive
officers represented 14.4% of the Company's shareholders' equity.

NORCAP OPTIONS

As compensation for the costs and risks associated with its efforts in
facilitating the 1990 acquisition of the Company by a group of investors that
included Mr. Espe, NorCap was granted an option to purchase 36,317 shares of
Common Stock at a price of $6.15 per share. As part of that same transaction,
NorCap was also granted an option to purchase shares of common stock of CNBI.
The option to purchase CNBI shares was converted into an option to purchase
13,859 shares of Common Stock at a price of $8.81 per share, as part of the
merger of CNBI with and into the Company that was completed in August 1993. The
NorCap options are exercisable at any time between September 25, 1993 and
September 26, 2000. NorCap is controlled by Mr. Espe, who owns 60% of NorCap's
common units, subject to conversion and limited voting rights of holders of its
convertible Series A units. Mr. Powell, a current director of the Company, is a
director of NorCap.

DESCRIPTION OF CAPITAL STOCK

COMMON STOCK

General. The Company currently is authorized to issue up to 10,000,000
shares of Common Stock. At September 30, 1996, there were 3,710,077 shares of
Common Stock outstanding, held of record by 852 shareholders.

58
<PAGE> 60

Voting. Each share of Common Stock is entitled to one vote on all matters
presented for shareholder vote, including the election of directors.
Shareholders do not have cumulative voting rights. Under Washington law,
directors are elected by a plurality of votes, where the nominees who receive
the greatest number of votes cast by the holders of shares entitled to vote will
be elected directors. Unless a corporation's articles of incorporation provide
otherwise, Washington law requires that certain fundamental corporate
transactions (such as mergers, asset sales and "going private" transactions) be
approved by the holders of at least two-thirds of the outstanding voting shares,
and that material amendments to a public corporation's articles of incorporation
be approved by the holders of at least a majority of the outstanding voting
shares. The Company's Articles do not provide otherwise except that any Business
Combination (as defined in the Articles) between the Company and any Control
Person (as defined in the Articles) must be approved by the holders of at least
66 2/3% of the total shares attributable to persons other than a Control Person
in certain circumstances. The Company's Articles further provide that such
provision may not be amended except by the affirmative vote of the holders of at
least 66 2/3% of the outstanding shares of the Company's Common Stock (subject
to the provisions of any preferred stock that may be issued by the Company).

Preemptive Rights. The holders of Common Stock do not have preemptive
rights to subscribe to any additional securities that the Company may issue.

Liquidation. In the event of the Company's liquidation, the holders of
Common Stock are entitled to share, pro rata, the assets of the Company
remaining after provision for liabilities.

Dividends, Distributions and Redemptions. Subject to such preferences as
may be applicable to any shares of preferred stock that may be authorized and
issued by the Company in the future, dividends may be paid on the Common Stock
as and when declared by the Board of Directors out of funds legally available
therefor. On May 22, 1996, the Company paid a 5% stock dividend. 164,051 common
shares were issued to shareholders. Management presently intends to retain
future earnings to support the development and growth of the Company.
Accordingly, the Company does not expect to pay cash dividends for the
foreseeable future. In addition, regulatory requirements also limit dividends,
distributions and redemptions with respect to the Common Stock.

Registration Rights. Dain Bosworth Incorporated, a lead underwriter of a
prior issue of securities by the Company, has warrants to purchase 18,716 shares
of the Company's Common Stock issuable at $10.14 per share. They are entitled to
certain rights with respect to registration under the Securities Act of shares
issuable upon exercise of such warrants. Under the terms of the warrants, if the
Company proposes to register any of its securities under the Securities Act, the
warrant holder is entitled to include such shares therein. Dain Bosworth
Incorporated has waived its right to include its shares in the offering. In
addition, Dain Bosworth Incorporated may require the Company on not more than
one occasion to register such shares at the Company's expense, and the Company
is required to use commercially reasonable efforts to effect such registration.

Transfer Agent and Registrar. The transfer agent and registrar for the
Common Stock is American Stock Transfer and Trust Company.

PREFERRED STOCK

The Company currently is authorized to issue up to 2,000,000 shares of
preferred stock. At June 30, 1996, no shares of preferred stock were issued and
outstanding. There is no existing or pending plan or agreement for the Company
to issue any preferred stock. The Company's Board of Directors has the authority
to issue preferred stock in one or more series and, subject to applicable law,
to fix and determine or to amend the relative rights and preferences of the
shares of any series so established, without any further vote or action of the
shareholders. By such applicable law, the Company's Board of Directors also has
the authority to determine the liquidation and dividend rights of any preferred
stock that may be issued, including priority over the liquidation and dividend
rights of holders of Common Stock.

59
<PAGE> 61

ANTI-TAKEOVER PROVISIONS

Certain provisions contained in the Company's Articles of Incorporation
(the "Articles") may deter potential acquirers from attempting a takeover of the
Company. The Articles require that any Business Combination (as defined in the
Articles) be approved by the affirmative vote of not less than 66 2/3% of the
total shares attributable to persons other than a Control Person (as defined in
the Articles). This "supermajority" approval is not required if the Company's
Board of Directors has approved the transaction or if certain other conditions
concerning nondiscrimination among shareholders and receipt of fair value are
satisfied. The Articles also include a provision that requires the Company's
Board of Directors to consider certain non-monetary factors in evaluating any
acquisition bid. Finally, the Articles provide, among other things, that the
Company may issue up to 2,000,000 shares of preferred stock, none of which
shares are currently issued and outstanding, without prior shareholder approval,
in one or more series, with such relative rights and preferences as the Board of
Directors may determine. The issuance of preferred stock under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company. These provisions, and certain provisions contained in
Chapter 19 of the Washington Business Corporation Act, Revised Code of
Washington Title 23B.19, which prohibit certain significant business
transactions if not accomplished in accordance with the statute, collectively
and individually, may discourage transactions such as mergers or tender offers
on terms which certain of the Company's shareholders may consider beneficial. As
a result, holders of the Common Stock may potentially be deprived of an
opportunity to sell their shares at a premium over market price.

INDEMNIFICATION

The Articles provide, among other things, for the indemnification of
directors, and authorize the Board of Directors to pay reasonable expenses
incurred by, or to satisfy a judgment or fine against, a current or former
director in connection with any personal legal liability incurred by the
individual while acting for the Company within the scope of his or her
employment and which were not the result of conduct finally adjudged to be
"egregious" conduct. "Egregious" conduct is defined as intentional misconduct, a
knowing violation of law or participation in any transaction from which the
person will personally receive a benefit in money, property or services to which
that person is not legally entitled. The Articles also include a provision that
limits the liability of directors from any personal liability to the Company or
its shareholders for conduct not found to have been egregious.

SHARES ELIGIBLE FOR FUTURE SALE

After completion of this offering, the Company will have outstanding
4,995,077 shares of Common Stock (assuming no exercise of the Underwriters
over-allotment option and no exercise of outstanding stock options). Of these
shares, the 1,285,000 shares of Common Stock offered hereby will be freely
tradeable without restriction or limitation under the Securities Act except to
the extent such shares become subject to the agreement with the Underwriters
described below or are held by "affiliates" of the Company as such term is
defined under Rule 144 under the Securities Act. In addition, an aggregate of
3,223,041 shares of Common Stock presently outstanding are not restricted and,
under certain conditions, may be freely tradeable without restriction or
limitation under the Securities Act. Shares owned by affiliates may only be sold
if they are registered under the Securities Act or if an exemption from
registration, such as that provided by Rule 144, is available.

The Company, its executive officers and directors and any affiliates
thereof, holding in the aggregate 469,640 shares of Common Stock on an as
converted or as exercised basis, have agreed not to directly or indirectly
offer, sell, pledge, contract to sell, grant any option to purchase or otherwise
dispose of any shares of Common Stock of the Company (except pursuant to its
stock plan or other employee benefit plans) for a period of 120 days after the
date of this Prospectus, without the prior written consent of Alex. Brown & Sons
Incorporated. See "Underwriting."

60
<PAGE> 62

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, Alex.
Brown & Sons Incorporated and Ragen MacKenzie Incorporated (the "Underwriters")
have severally agreed to purchase from the Company the following respective
numbers of shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.................................................. 642,500
Ragen MacKenzie Incorporated..................................................... 642,500
---------
Total............................................................................ 1,285,000
---------
---------
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of Common Stock offered hereby if any of
such shares are purchased.

The Company has been advised by the Underwriters that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $0.58 per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $0.10 per
share to certain other dealers. After the public offering, the offering price
and other selling terms may be changed by the Underwriters.

The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of the final Prospectus, to purchase up to
192,750 additional shares of Common stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown on the above table bears to 1,285,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 1,285,000 shares are being offered.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.

The Company, its executive officers and directors and any affiliates
thereof, holding in the aggregate 469,640 shares of Common Stock on an as
converted or exercised basis, have agreed not to directly or indirectly offer,
sell, pledge, contract to sell, grant any option to purchase or otherwise
dispose of any shares of Common Stock of the Company (except pursuant to its
stock plan or other employee benefit plans) for a period of 120 days after the
date of this Prospectus, without the prior written consent of Alex. Brown & Sons
Incorporated.

In 1993, Ragen MacKenzie Incorporated, one of the Underwriters, acted as a
representative of the underwriters in connection with an offering of 1,580,000
shares of Common Stock.

In connection with this offering, certain Underwriters and selling group
members (if any) who are qualifying registered market makers on Nasdaq may
engage in passive market making transactions in the Common Stock on the Nasdaq
National Market in accordance with Rule 10b-6A under the Exchange Act during the
two business day period before commencement of sales in this offering. The
passive market making transactions must comply with applicable price and volume
limits and be identified as such. In general, a passive market maker may display
its bid at a price not in excess of the highest independent bid for the
security; if all independent bids are lowered below the passive market maker's
bid, however, such bid must then be lowered when certain purchase limits are
exceeded. Net purchases by a passive market maker on each day are generally
limited to a specified percentage of the passive market maker's average daily
trading volume in the Common

61
<PAGE> 63

Stock during a prior period and must be discontinued when such limit is reached.
Passive market making may stabilize the market price of the Common Stock at a
level above that which might otherwise prevail, and if commenced, may be
discontinued at any time.

LEGAL MATTERS

The validity of the Common Stock offered by this Prospectus will be passed
upon for the Company by Gordon, Thomas, Honeywell, Malanca, Peterson & Daheim,
P.L.L.C., Tacoma, Washington. Members of Gordon, Thomas, Honeywell, Malanca,
Peterson & Daheim, beneficially owned 76,384 shares of the Company Common Stock
at September 30, 1996. Certain legal matters will be passed upon for the
Underwriters by Gibson, Dunn & Crutcher LLP, San Francisco, California.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995 included in this Prospectus have been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.

62
<PAGE> 64

COLUMBIA BANKING SYSTEM, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets at June 30, 1996 (unaudited) and December 31, 1995 and
1994................................................................................ F-3
Consolidated Statements of Operations for the six months ended June 30, 1996 and 1995
(unaudited) and the years ended December 31, 1995, 1994 and 1993.................... F-4
Consolidated Statements of Shareholders' Equity for the six months ended June 30, 1996
(unaudited) and the years ended December 31, 1995, 1994 and 1993.................... F-5
Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and 1995
(unaudited) and the years ended December 31, 1995, 1994 and 1993.................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 65

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Columbia Banking System, Inc.

In our opinion, the accompanying consolidated balance sheets as of December
31, 1995 and 1994, and the related consolidated statements of operations, of
shareholders' equity and of cash flows for each of the three years in the period
ended December 31, 1995, present fairly, in all material respects, the financial
position of Columbia Banking System, Inc. and its subsidiaries, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Seattle, Washington
January 24, 1996
except as to Note 17,
which is as of May 22, 1996

F-2
<PAGE> 66

COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- --------
JUNE 30,
1996
-----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
A S S E T S
Cash and due from banks.................................... $ 22,326 $ 18,244 $ 11,357
Interest-earning deposits with banks....................... 10,415 12,635 2,301
Securities available for sale:
U.S. Treasury and government agencies.................... 16,734 6,948
Mortgage-backed.......................................... 11,268 12,446 2,718
FHLB stock............................................... 4,082 3,281
----------- -------- --------
Total securities available for sale................... 32,084 22,675 2,718
Investment securities:
U.S. Treasury............................................ 1,003
Mortgage-backed.......................................... 16,389
FHLB stock and other..................................... 2,149
----------- -------- --------
Total investment securities (market value:
12/31/94 -- $18,661)................................ 19,541
Loans held for sale........................................ 1,950 1,367 1,612
Loans...................................................... 401,554 353,093 268,996
Less: allowance for loan losses.......................... 4,411 3,748 2,711
----------- -------- --------
Loans, net............................................ 397,143 349,345 266,285
Interest receivable........................................ 2,893 2,469 1,734
Premises and equipment, net................................ 13,532 13,736 8,972
Real estate owned.......................................... 3,304 3,227
Other...................................................... 1,269 1,431 1,325
----------- -------- --------
Total Assets..................................... $ 481,612 $425,206 $319,072
=========== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing...................................... $ 63,208 $ 52,991 $ 37,251
Interest-bearing......................................... 339,706 308,884 231,441
----------- -------- --------
Total deposits........................................ 402,914 361,875 268,692
Federal Home Loan Bank advances............................ 37,000 25,000 17,000
Other borrowings........................................... 2,300
Other liabilities.......................................... 3,252 3,669 1,784
Convertible subordinated notes............................. 2,363 2,695 2,735
----------- -------- --------
Total liabilities..................................... 447,829 393,239 290,211
Commitments and contingent liabilities (Note 14)
Shareholders' equity:
Preferred stock (no par value)
Authorized, 2,000,000 shares; None outstanding
</TABLE>

<TABLE>
<CAPTION>
JUNE DECEMBER 31,
30, ----------------
Common stock (no par value) 1996 1995 1994
------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Authorized shares............ 10,000 10,000 10,000
Issued and outstanding....... 3,482 3,274 3,258 33,354 30,806 30,703
Retained earnings........................................ 957 1,274 (1,481)
Unrealized losses on securities available for sale....... (528) (113) (361)
----------- -------- --------
Total shareholders' equity............................ 33,783 31,967 28,861
----------- -------- --------
Total Liabilities and Shareholders' Equity....... $ 481,612 $425,206 $319,072
========== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE> 67

COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------- ---------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME
Loans.............................................................. $16,943 $13,978 $30,038 $18,990 $12,258
Investment securities.............................................. 571 1,078 1,127 1,108
Securities available for sale...................................... 826 99 290 205 227
Deposits with banks................................................ 328 69 314 334 362
------- ------- ------- ------- -------
Total interest income....................................... 18,097 14,717 31,720 20,656 13,955
INTEREST EXPENSE
Deposits........................................................... 7,593 5,990 13,385 7,304 4,867
Federal Home Loan Bank advances.................................... 884 664 1,503 1,160 1,788
Other borrowings................................................... 125 138 271 612 876
------- ------- ------- ------- -------
Total interest expense...................................... 8,602 6,792 15,159 9,076 7,531
------- ------- ------- ------- -------
NET INTEREST INCOME.................................................. 9,495 7,925 16,561 11,580 6,424
Provision for loan losses.......................................... 760 600 1,250 1,000 502
------- ------- ------- ------- -------
Net interest income after provision for loan losses......... 8,735 7,325 15,311 10,580 5,922
NONINTEREST INCOME
Service charges and other fees..................................... 1,148 905 1,895 1,242 556
Mortgage banking................................................... 308 191 394 782 512
Gains (losses) on sales of securities available for sale........... (8) 842
Gains on sales of loans, net....................................... 39 71
Credit card fees and other fees.................................... 1,017 737 1,671 972 62
------- ------- ------- ------- -------
Total noninterest income.................................... 2,473 1,833 3,991 2,996 2,043
NONINTEREST EXPENSE
Compensation and employee benefits................................. 3,627 3,737 7,339 6,219 4,134
Occupancy.......................................................... 1,616 1,344 2,845 2,802 2,380
Professional services.............................................. 278 220 436 427 867
Advertising and promotion.......................................... 374 338 634 508 735
Printing and supplies.............................................. 192 192 375 397 710
Regulatory assessments............................................. 184 320 482 475 296
Data processing.................................................... 363 295 615 463 160
Gains on, and net cost of, real estate owned....................... (264) (400) (314) (253)
Other.............................................................. 2,734 1,929 4,221 3,059 1,627
------- ------- ------- ------- -------
Total noninterest expense................................... 9,368 8,111 16,547 14,036 10,656
------- ------- ------- ------- -------
Income (loss) from continuing operations before income
tax....................................................... 1,840 1,047 2,755 (460) (2,691)
------- ------- ------- ------- -------
Provision for income tax
Income (loss) from continuing operations before
extraordinary item and cumulative effect of accounting
change.................................................... 1,840 1,047 2,755 (460) (2,691)
Extraordinary loss on extinguishment of debt, net.................. (154)
Cumulative effect of accounting change............................. 252
------- ------- ------- ------- -------
NET INCOME (LOSS).................................................... $ 1,840 $ 1,047 $ 2,755 ($ 614) ($2,439)
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Per share (on average shares outstanding):
Income (loss) from continuing operations........................... $ 0.52 $ 0.30 $ 0.79 ($ 0.13) ($ 1.17)
Extraordinary loss on extinguishment of debt, net.................. (0.05)
Cumulative effect of accounting change............................. 0.11
Net income (loss).................................................. 0.52 0.30 0.79 (0.18) (1.06)
Fully diluted net income (loss).................................... 0.52 0.30 0.79 (0.18) (1.06)
Average number of common and common equivalent shares outstanding.... 3,566 3,484 3,496 3,481 2,301
Fully diluted average common and common equivalent shares
outstanding........................................................ 3,790 3,742 3,752 3,740 2,560
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE> 68

COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
--------------------- UNREALIZED TOTAL
NUMBER OF RETAINED GAINS AND SHAREHOLDERS'
SHARES AMOUNT EARNINGS (LOSSES) EQUITY
--------- ------- -------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992... 1,336 $10,069 $ 1,572 $ 11,641
Net loss..................... (2,439) (2,439)
Issuance of shares of common
stock, net................ 1,914 20,599 20,599
------- ------- -------- --------- -----------
BALANCE AT DECEMBER 31, 1993... 3,250 30,668 (867) 29,801
Adjustment to beginning
balance for change in
accounting method, net.... ($ 32) (32)
Net loss..................... (614) (614)
Issuance of shares of common
stock, net................ 8 35 35
Change in unrealized
losses.................... (329) (329)
------- ------- -------- --------- -----------
BALANCE AT DECEMBER 31, 1994... 3,258 30,703 (1,481) (361) 28,861
Net income................... 2,755 2,755
Issuance of shares of common
stock, net................ 16 103 103
Change in unrealized gains
and (losses).............. 248 248
------- ------- -------- --------- -----------
BALANCE AT DECEMBER 31, 1995... 3,274 30,806 1,274 (113) 31,967
Net income (unaudited)....... 1,840 1,840
Issuance of shares of common
stock, net................ 44 391 391
Issuance of shares of common
stock -- 5% stock
dividend.................. 164 2,157 (2,157)
Change in unrealized gains
and (losses).............. (415) (415)
------- ------- -------- --------- -----------
BALANCE AT JUNE 30, 1996
(UNAUDITED).................. 3,482 $33,354 $ 957 ($ 528) $ 33,783
======= ======= ======== ========= ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE> 69

COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------- ------------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)

<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)......................................... $ 1,840 $ 1,047 $ 2,755 $ (614) $ (2,439)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Provision for loan losses............................... 760 600 1,250 1,000 502
Losses (gains) on real estate owned..................... 41 (11) 29 (30) (26)
Depreciation and amortization........................... 1,057 588 1,365 1,610 1,162
Deferred income tax (benefit)........................... (252)
Net realized losses (gains) on sales of investments..... 196 (22) (53) (12) (62)
(Increase) decrease in loans held for sale.............. (583) (716) 245 165 244
Increase in interest receivable......................... (424) (444) (735) (635) (325)
(Decrease) increase in interest payable................. (12) 438 388 538 104
Net changes in other assets and liabilities............. (282) 249 1,317 (352) 673
-------- -------- -------- -------- --------
Net cash provided (used) by operating activities... 2,593 1,729 6,561 1,670 (419)
INVESTING ACTIVITIES
Proceeds from maturities of securities available for
sale.................................................... 9,428 215 537
Proceeds from maturities of mortgage-backed securities
available for sale...................................... 807
Proceeds from maturities of investment securities......... 4,243 2,557 1,047
Proceeds from maturities of mortgage-backed securities.... 1,220
Proceeds from sales of securities available for sale...... 5,980
Proceeds from sales of investment securities.............. 507
Proceeds from sales of loans.............................. 4,756 3,570
Purchase of securities available for sale................. (19,937) (6,000)
Purchases of investment securities........................ (3,546) (4,675) (266) (17,197)
Loans originated and acquired, net of principal
collected............................................... (48,785) (54,319) (88,579) (88,286) (63,491)
Purchases of premises and equipment....................... (1,045) (4,434) (6,660) (3,544) (3,681)
Proceeds from disposal of premises and equipment.......... 140 240 412 2
Proceeds from sale of real estate owned................... 3,263 13 13 536 110
Other, net................................................ (71) (119) 273
-------- -------- -------- -------- --------
Net cash used by investing activities.............. (56,129) (61,137) (90,586) (88,054) (78,860)
FINANCING ACTIVITIES
Net increase in deposits.................................. 41,039 45,016 93,183 103,353 47,325
Net increase in other borrowings.......................... 2,300
Proceeds from FHLB advances and other long-term debt...... 20,800 17,000 17,000 17,000 41,000
Repayment of FHLB advances and other long-term debt....... (8,800) (9,000) (32,000) (27,000)
Repayment of other borrowings............................. (4,600)
Proceeds from issuance of common stock.................... 59 16 63 35 17,901
-------- -------- -------- -------- --------
Net cash provided by financing activities.......... 55,398 62,032 101,246 83,788 79,226
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash equivalents... 1,862 2,624 17,221 (2,596) (53)
Cash and cash equivalents at beginning of period... 30,879 13,658 13,658 16,254 16,307
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period................ $ 32,741 $ 16,282 $ 30,879 $ 13,658 $ 16,254
======== ======== ======== ======== ========
Supplemental information:
Cash paid for interest.................................... $ 8,614 $ 6,354 $ 14,771 $ 8,538 $ 7,427
Transfer from investment securities to securities
available for sale...................................... 19,912 4,162
Loans foreclosed and transferred to real estate owned..... 428 236
Issuance of common stock from conversion of convertible
subordinated notes...................................... 332 15 40 2,698
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE> 70

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments including normal recurring
accruals necessary for a fair presentation of results of operations for the
interim periods included herein have been made. The results of operations for
the six months ended June 30, 1996 are not necessarily indicative of results to
be anticipated for the year ending December 31, 1996. Certain amounts in the
1995 financial statements have been reclassified to conform with the 1996
interim presentation.

Consolidation

The consolidated financial statements of the Company include the accounts
of the corporation and its wholly owned subsidiaries after the elimination of
all material intercompany transactions and accounts.

Securities

Securities to be held for indefinite periods of time and not intended to be
held to maturity or on a long-term basis are classified as available for sale
and carried at market value. Unrealized gains and losses are recorded directly
to a component of shareholders equity. Securities held for indefinite periods of
time include securities that management intends to use as part of its
asset/liability management strategy and that may be sold in response to changes
in interest rates and/or significant prepayment risk.

Investment securities are those securities which the Company has the
ability and intent to hold to maturity. Events which may be reasonably
anticipated are considered when determining the Company's intent to hold
investment securities until maturity. Investment securities are carried at cost,
adjusted for amortization of premiums and accretion of discounts using a method
that approximates the interest method. Gains and losses on the sale of all
securities are determined using the specific identification method.

Loans

Loans are stated at their principal amount outstanding, less any
unamortized discounts and deferred net loan fees. Loans held for sale are
carried at the lower of cost or market value. The amount by which cost exceeds
market for loans held for sale is accounted for as a valuation allowance and
changes in the allowance are included in the determination of net income in the
period in which the change occurs.

The current policy of the Company, generally, is to discontinue the accrual
of interest on all loans past due 90 days or more and place them on nonaccrual
status.

Premiums or discounts on loans purchased and sold are amortized, using the
interest method, over periods which approximate the average life of the loans.

Loan Fee Income

Loan origination fees and certain direct loan origination costs are
deferred and the net amount recognized as an adjustment to yield over the
contractual life of the loans. Costs related to

F-7
<PAGE> 71

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

origination of credit cards are expensed as incurred. Fees related to lending
activity other than the origination or purchase of loans are recognized as
noninterest income during the period the related services are performed.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed to be
sufficient to absorb potential losses in the portfolio. Management's
determination of the adequacy of the allowance is based on a number of factors,
including the level of nonperforming loans, loan loss experience, credit
concentrations, a review of the quality of the loan portfolio, collateral values
and uncertainties in economic conditions.

Premises and Equipment

Premises and equipment are recorded at cost and depreciated over the
estimated useful lives of the assets. Depreciation and amortization are computed
using the straight-line method. Gains or losses on dispositions are reflected in
operations. Expenditures for improvements and major renewals are capitalized,
and ordinary maintenance, repairs and small purchases are charged to operations
as incurred.

Real Estate Owned

All real estate acquired in satisfaction of a loan is considered held for
sale and reported as "real estate owned." Real estate owned is carried at the
lower of cost or fair value less estimated cost of disposal. Cost at the time of
foreclosure is defined as the fair value of the asset less estimated disposal
costs.

Intangible Assets

Intangible assets represent assets purchased by the Company in mergers and
acquisitions. The recorded cost of each asset is amortized using the
straight-line method over its estimated useful life (up to 15 years for core
deposit intangible assets and 25 years for goodwill).

At December 31, 1995 and 1994, intangible assets amounted to $266,000 and
$339,000, respectively, net of accumulated amortization.

Income Tax

The provision for income tax generally is based on income and expense
reported for financial statement purposes, using the "asset and liability
method" for accounting for deferred income tax. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded against any deferred tax
assets for which it is more likely than not that the deferred tax asset will not
be realized.

Earnings Per Share

Primary and fully diluted earnings per share are computed using the
weighted average number of shares of common and common equivalent shares
outstanding. Common equivalent shares result

F-8
<PAGE> 72

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

from the assumed exercise of outstanding stock options, if dilutive. Fully
diluted earnings per share assumes conversion of convertible subordinated notes,
if dilutive. (See Note 17).

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates are used in determining the level of the allowance for loan losses,
valuation allowance on deferred tax assets, depreciation of premises and
equipment and others.

Statement of Cash Flows

The accompanying consolidated statement of cash flows has been prepared
using the "indirect" method for presenting cash flows from operating activities.
For purposes of this statement, cash and cash equivalents include cash and due
from banks, interest-earning deposits with banks and federal funds sold.

Reclassification

Certain amounts in the 1994 and 1993 consolidated financial statements have
been reclassified to conform with the 1995 presentation. These reclassifications
had no effect on net income (loss).

2. MERGERS

In August 1993 the Company merged with Columbia National Bankshares, Inc.
("CNBI"), and its sole subsidiary Columbia National Bank, located in Longview,
Washington (now Columbia State Bank, Tacoma, Washington, a state-chartered,
FDIC-insured commercial bank). The transaction called for the exchange of .1622
shares of the Company's common stock for each share of CNBI stock. Shareholders
of Columbia National Bank ("Columbia Bank"), except CNBI, also received .1622
shares of the Company's common stock for each share of Columbia National Bank
common stock. The merger was accounted for in a manner similar to a pooling of
interests due to common control, and, accordingly, pre-merger historical
financial information has been restated to include the accounts of CNBI.

In March and October 1994, respectively, the Company merged its wholly
owned subsidiaries Columbia Savings Bank, A Federal Savings Bank ("the Savings
Bank") and Columbia First Service, Inc. into Columbia Bank. As a result of the
mergers, Columbia Bank remains as the Company's sole subsidiary, and its
operations include all activities related to mortgage banking and servicing.

3. TERMINATION OF ASSISTANCE AGREEMENT AND EXTINGUISHMENT OF DEBT

In connection with the acquisition of the Savings Bank in 1988, the Savings
Bank and the Company entered into an agreement (the "Assistance Agreement"),
pursuant to which the Federal Savings and Loan Insurance Corporation ("the
FSLIC") provided various forms of financial and other assistance to the Savings
Bank, including the purchase of a $5 million subordinated debenture due August
2, 1998. On September 30, 1994, Columbia Bank entered into an agreement with the
FDIC, as successor to the FSLIC, to terminate the Assistance Agreement and to
settle the obligations under the subordinated debenture for $4.6 million,
resulting in an extraordinary nonrecurring loss of approximately $154,000.

F-9
<PAGE> 73

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. RESTRICTIONS ON SUBSIDIARY CASH, LOANS AND DIVIDENDS

Columbia Bank is required to maintain reserve balances with the Federal
Reserve Bank. The average required reserves at December 31, 1995 were
approximately $200,000. The required reserves are based on specified percentages
of Columbia Bank's total average deposits. The percentages of deposits required
to be maintained are established by the Federal Reserve Board.

Under Federal Reserve regulations, Columbia Bank, generally, is limited as
to the amount it may loan to the Company, to 10 percent of its combined capital
stock and additional paid-in capital. Such loans must be collateralized by
specified obligations.

Under Washington state banking regulations, Columbia Bank is limited as to
the ability to declare or pay dividends to the Company up to the amount of
Columbia Bank's net profits then on hand, less any required transfers to
additional paid-in capital.

5. SECURITIES AVAILABLE FOR SALE

Effective January 1, 1994, the Company adopted the FASB's Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). SFAS 115 generally requires that
investments in equity and debt securities be classified as either investment
securities, trading securities or securities available for sale. Securities that
are bought with the positive intent and ability to hold to maturity ("investment
securities") are reported at amortized cost. Securities that are bought
principally for the purpose of selling them in the near term ("trading
securities") are reported at fair value, with unrealized gains and losses
included in net income. Securities to be held for indefinite periods of time and
not intended to be held to maturity ("securities available for sale") are
reported at fair value, with unrealized gains and losses excluded from net
income and reported in a separate component of shareholders equity. At December
31, 1995 and 1994, the Company had no trading securities.

The following table summarizes the amortized cost, gross unrealized gains
and losses and the resulting market value of securities available for sale.

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1995:
U.S. Treasury & government agency.......... $ 6,935 $ 13 $ 6,948
Mortgage-backed............................ 12,572 $ (126) 12,446
FHLB stock................................. 3,281 3,281
-------- -------- --------- -------
Total.............................. $22,788 $ 13 $ (126) $22,675
======== ======== ========= =======
December 31, 1994:
Mortgage-backed............................ $ 3,079 $ (361) $ 2,718
======== ======== ========= =======
December 31, 1993:
Mortgage-backed............................ $ 3,621 $ (32) $ 3,589
======== ======== ========= =======
</TABLE>

In November 1995, the FASB issued a Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In addition to the report, the FASB permitted a one-time
opportunity for institutions to reassess the appropriateness of the designations
of all securities. Accordingly, in December 1995, the Company reclassified all
"invest-

F-10
<PAGE> 74

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ment securities" as "securities available for sale" resulting in additional net
unrealized losses of $113,000.

In December 1995 the Company sold mortgage-backed-securities available for
sale with a market value of $5.9 million for a net loss of $8,000. Proceeds from
sales of securities available for sale during 1993 were $5.7 million, resulting
in gross gains of $842,000 and no gross losses.

At December 31, 1995, securities available for sale with a fair value of
$3.0 million were pledged to secure public deposits and for other purposes as
required or permitted by law. No securities available for sale were pledged at
December 31, 1994 and 1993.

The following table summarizes the recorded and market values of securities
available for sale by contractual maturity groups:

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------
AMORTIZED MARKET
COST VALUE
--------- -------
(IN THOUSANDS)
<S> <C> <C>
Amount maturing:
Within one year................................................... $ 1,911 $ 1,909
Greater than one year and less than five years.................... 13,537 13,413
Greater than five years and less than ten years................... 2,034 2,034
After ten years................................................... 5,306 5,318
-------- -------
Total..................................................... $22,788 $22,675
======== =======
</TABLE>

6. INVESTMENT SECURITIES

At December 31, 1995, the Company had no securities held for investment
purposes. The following table summarizes the recorded value, gross unrealized
gains and losses and the resulting market value of investment securities at
December 31, 1994 and 1993:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1994:
U.S. Treasury.............................. $ 1,003 $ (17) $ 986
Mortgage-backed............................ 16,389 (863) 15,526
FHLB stock and other....................... 2,149 2,149
-------- -------- --------- -------
Total.............................. $19,541 $ (880) $18,661
======== ======== ========= =======
December 31, 1993:
U.S. Treasury.............................. $ 1,009 $ 1,009
Mortgage-backed............................ 19,038 $ 70 $ (12) 19,096
FHLB stock and other....................... 1,883 1,883
-------- -------- --------- -------
Total.............................. $21,930 $ 70 $ (12) $21,988
======== ======== ========= =======
</TABLE>

No investment securities were sold during 1995 and 1994. Proceeds from
sales of investment securities during 1993 were $507,000, resulting in gross
gains of $37,500 and no gross losses. In computing gains and losses, cost is
determined using the specific identification method.

F-11
<PAGE> 75

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1994 and 1993, investment securities with face values of
$2.3 million and $1.0 million, respectively, were pledged to secure public
deposits and for other purposes as required or permitted by law.

7. LOANS

The following is an analysis of the loan portfolio by major types of loans:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
JUNE 30, -------- --------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
(IN THOUSANDS)
Real estate:
One- to four-family residential.................. $ 69,364 $ 67,991 $ 76,260
Five or more family residential and commercial
properties.................................... 117,486 97,103 68,531
----------- -------- --------
Total real estate............................. 186,850 165,094 144,791
Real estate construction:
One- to four-family residential.................. 23,870 22,741 17,411
Five or more family residential and commercial
properties.................................... 10,466 8,884 4,004
----------- -------- --------
Total real estate construction................ 34,336 31,625 21,415
Commercial business................................ 132,251 113,775 72,829
Consumer........................................... 48,547 43,343 30,860
----------- -------- --------
Subtotal......................................... 401,984 353,837 269,895
Less deferred loan fees, net and other............. (430) (744) (899)
----------- -------- --------
Total loans...................................... $ 401,554 $353,093 $268,996
========== ======== ========
Loans held for sale................................ $ 1,950 $ 1,367 $ 1,612
========== ======== ========
</TABLE>

At June 30, 1996, December 31, 1995 and 1994, residential real estate loans
with recorded values of $44.4 million, $30.0 million and $20.4 million,
respectively, were pledged to secure Federal Home Loan Bank advances and for
other purposes.

The following table summarizes certain information related to nonperforming
loans:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994 1993
JUNE 30, ---- ---- ------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Loans accounted for on a nonaccrual basis...... $ 676 $435 $452 $1,631
Restructured loans............................. 69 29 44 94
--------- ---- ---- ------
Total nonperforming loans.................... $ 745 $464 $496 $1,725
======== ==== ==== ======
Originally contracted interest................. $ 26 $ 49 $ 50 $ 153
Recorded interest.............................. 4 38 27 103
--------- ---- ---- ------
Reduction in interest income................. $ 22 $ 11 $ 23 $ 50
======== ==== ==== ======
</TABLE>

In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114), which
requires that impaired loans (as defined) be measured based on the present value
of expected future cash flows discounted at the loan's effective interest rate
or the fair value of the bank's collateral. In October 1994, the Board

F-12
<PAGE> 76

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

issued Statement No. 118 ("SFAS 118"), amending SFAS 114 with regard to income
recognition and disclosure related to impaired loans. Impaired loans, generally
refer to all loans that are restructured in a troubled debt restructuring
involving a modification of terms, nonaccrual loans and loans past due 90 days
and still accruing. The Company adopted the new standard in 1995.

At June 30, 1996 and December 31, 1995, the recorded investment in impaired
loans was $1.0 million and $616,000, respectively. No specific allocated
allowance for loan losses has been made for impaired loans. The average recorded
investment in impaired loans for the periods ended June 30, 1996 and December
31, 1995 was $1.0 million and $513,000, respectively.

In September 1995, the Company sold approximately $4.8 million in lower
yielding one to four-family adjustable rate real estate loans realizing a gain
on the sale of $39,000.

At June 30, 1996, December 31, 1995 and 1994, there were no commitments to
loan additional funds on loans accounted for on a nonaccrual basis.

At December 31, 1995 and 1994, the Company had no foreign loans or loans
related to highly leveraged transactions.

The Company's banking subsidiary has granted loans to officers and
directors of the Company and their associates. These loans are made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than the normal risk of collectibility. The aggregate dollar
amount of these loans were $3.2 million, $4.6 million and $4.5 million at June
30, 1996, December 31, 1995 and 1994, respectively. During 1995, $1.2 million of
new related party loans were made and repayments and transfers totaled $1.1
million.

8. ALLOWANCE FOR LOAN LOSSES

Transactions in the allowance for loan losses are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
JUNE 30, ------ ------ ------
1996
-----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period................... $ 3,748 $2,711 $1,992 $1,539
Loans charged off................................ (111) (263) (364) (110)
Recoveries....................................... 14 50 83 61
---------- ------ ------ ------
Net charge-offs................................ (97) (213) (281) (49)
Provision charged to operating expense........... 760 1,250 1,000 502
---------- ------ ------ ------
Balance at end of period............... $ 4,411 $3,748 $2,711 $1,992
========== ====== ====== ======

</TABLE>

F-13
<PAGE> 77

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. PREMISES AND EQUIPMENT

Land, buildings, and furniture and equipment, less accumulated depreciation
and amortization, were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 1,748 $ 500
Buildings.............................................. 8,589 5,204
Leasehold improvements................................. 1,509 1,132
Furniture and equipment................................ 5,533 4,362
Automobiles............................................ 101 62
Computer software...................................... 691 638
------- -------
Total cost................................... 18,171 11,898
Less accumulated depreciation and amortization......... (4,435) (2,926)
------- -------
Total........................................ $13,736 $ 8,972
======= =======
</TABLE>

Total depreciation and amortization expense on buildings and furniture and
equipment was $1,678,000, $1,610,000 and $1,300,000 for the years ended December
31, 1995, 1994 and 1993, respectively.

The Company is obligated under various noncancellable lease agreements for
property and equipment (primarily for land and buildings) which require future
minimum rental payments, exclusive of taxes and other charges, as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
------------------------------------------------------------- --------------
<S> <C>
1996......................................................... $ 883
1997......................................................... 744
1998......................................................... 701
1999......................................................... 608
2000......................................................... 389
2001 and thereafter.......................................... 2,158
----------
Total minimum payments............................. $5,483
==========
</TABLE>

Total rental expense on buildings and equipment was $946,000, $909,000 and
$474,000 for the years ended December 31, 1995, 1994 and 1993, respectively.

10. FEDERAL HOME LOAN BANK ADVANCES AND LONG-TERM DEBT

Federal Home Loan Bank of Seattle (FHLB) advances and long-term debt
consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
FHLB........................................................... $25,000 $17,000
7.85% Convertible subordinated notes due June 30, 2002......... 2,695 2,735
------- -------
Total FHLB advances and other long-term debt......... $27,695 $19,735
======= =======
</TABLE>

F-14
<PAGE> 78

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Convertible Notes are redeemable in whole or in part at any time at the
option of the Company. At the option of the holder, the Convertible Notes are
convertible into shares of Common Stock at any time prior to maturity at a
conversion price of $10.56 per share subject to adjustment under certain
circumstances.

FHLB advances are at the following interest rates:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
7.10........................................ $ 2,000
6.90........................................ $ 5,000 5,000
6.20........................................ 2,000
6.09........................................ 8,000
5.32........................................ 5,000 5,000
5.20........................................ 5,000 5,000
--------- ---------
Total............................. $ 25,000 $ 17,000
========= =========
</TABLE>

Aggregate maturities of FHLB advances due in years ending December 31,
1995, are as follows:

<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
1996................................................. $ 13,000
1998................................................. 10,000
2000................................................. 2,000
------------
Total...................................... $ 25,000
============
</TABLE>

FHLB advances are collateralized by residential real estate loans with a
recorded value of approximately $30.0 million at December 31, 1995, and $20.4
million at December 31, 1994 (see Note 7). Penalties are generally required for
prepayments of certain long-term FHLB advances.

At December 31, 1995, the Company had an unused $5 million line of credit
with a commercial bank bearing interest at prime plus 0.25% expiring October 1,
1996 at which time the balance on the line of credit becomes payable in
quarterly installments over 18 months. The line of credit is secured by common
stock of Columbia Bank.

11. INCOME TAX

The components of income tax expense are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1995 1994 1993
SIX MONTHS ---- ---- ----
ENDED
JUNE 30, 1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Current.....................................
Deferred....................................
---------- ---- ---- ----
Total............................. None None None None
========== ==== ==== ====
</TABLE>

Effective January 1, 1993, the Company adopted the FASB's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). This Statement requires the use of the "asset and liability" method of
accounting for income taxes. Deferred income tax represents the net tax effects
of temporary differences between the carrying amounts of assets and liabilities
for

F-15
<PAGE> 79

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financial reporting purposes and the amounts used for income tax purposes. As
permitted under SFAS 109, financial statements for years prior to 1993 have not
been restated. However, the cumulative effect on prior years of adopting SFAS
109 -- an income increase of $252,000 -- is included in 1993 income.

Significant components of the Company's deferred tax assets and liabilities
at June 30, 1996, December 31, 1995 and 1994 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
JUNE 30, ------- -------
1996
-----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................ 733 $ 1,478 $ 2,799
Tax credit carryover................................... 673 595 595
Allowance for loan losses.............................. 1,499 1,274 92
Contributions.......................................... 129 97 56
----------- ------- -------
Total deferred tax assets...................... 3,034 3,444 4,372
Less: valuation allowance.............................. (2,051) (2,606) (3,580)
----------- ------- -------
Subtotal....................................... 983 838 792
Deferred tax liabilities:
FHLB stock dividends................................... (601) (551) (487)
"SAIF" special assessment.............................. (104)
Depreciation........................................... (26) (35) (53)
----------- ------- -------
Total deferred tax liabilities................. (731) (586) (540)
----------- ------- -------
Net deferred tax assets........................ $ 252 $ 252 $ 252
=========== ======= =======
</TABLE>

For federal income tax purposes the Company has available net operating
loss carryforwards to reduce future taxable income approximately as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
EXPIRATION DATE DECEMBER 31, 1995
------------------------------------------------- JUNE 30, ------------
1996
-----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
2002............................................. -- $ 715
2003............................................. -- 648
2004............................................. 41 876
2005............................................. 75 75
2006............................................. 223 223
2008............................................. 1,740 1,740
2009............................................. 76 76
---------- -----------
Total net operating loss
carryforwards........................ $ 2,155 $4,353
========== ===========
</TABLE>

Additionally, at June 30, 1996, the Company had alternative minimum tax,
investment and rehabilitation tax credit carryforwards of approximately
$673,000, of which $581,000 expires in 1997, $14,000 expires in 1999 and the
remainder in 2010. However, because of annual limitations on the utilization of
net operating loss carryforwards due to changes in control, and because the
Internal Revenue Code of 1986 requires that net operating loss carryforwards be
utilized before tax credit carryforwards, the Company may not receive an income
tax benefit from the tax credit carryforwards.

F-16
<PAGE> 80

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of the Company's effective income tax rate with the
federal statutory tax rate is as follows:

<TABLE>
<CAPTION>
JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ------------------------------------------------------
1996 1995 1994 1993
---------------- ---------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ -------
(UNAUDITED) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income tax based on statutory
rate............................. $(625 ) (34)% $(937 ) (34)% $ 209 34% $ 918 34%
Increase (reduction) resulting
from:
Other nondeductible items........ 70 4 (37 ) (1) (27 ) (4)
Valuation allowance.............. 555 30 974 35 (182 ) (30) (918 ) (34)
----- ------ ------ ------- ----- ------ ------ ------
Total securities available for
sale......................... 32,084 22,675 2,718
Investment securities:
U.S. Treasury.................... 1,003
Mortgage-backed.................. 16,389
FHLB stock and other............. 2,149
Income tax................. $ 0 0% $ 0 0% $ 0 0% $ 0 0%
===== ====== ====== ======= ===== ====== ====== ======
</TABLE>

12. STOCK OPTIONS AND WARRANTS
At December 31, 1995 and 1994, the Company had stock options outstanding of
247,433 shares and 247,170 shares, respectively, for the purchase of common
stock at option prices ranging from $2.38 to $11.19 per share. The Company's
policy is to recognize compensation expense at the date the options were granted
due to the difference, if any, between the estimated market value of the
underlying common stock in excess of the stated option price.
At December 31, 1995 and 1994, the Company had a stock warrant outstanding
to purchase 18,716 shares of common stock at $10.14 per share, which expire in
1997.
At December 31, 1995 and 1994, the Company had stock options outstanding
granted to a company controlled by a director for the purchase of 36,317 and
13,858 shares of common stock at an exercise price of approximately $6.15 and
$8.81 per share, respectively. These options are generally exercisable in whole
or in part at any time before September 26, 2000.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The
statement requires the Company to elect to account for stock-based compensation
on a fair value basis or an intrinsic value basis. The intrinsic value basis is
currently used by the Company and is the accounting principle prescribed by
Accounting Principles Board No. 25 "Accounting for Stock Issued to Employees"
(APB 25). SFAS 123 requires disclosure in the footnotes of the pro forma impact
on net income and earnings per share of the difference between compensation
expense using the intrinsic value method and the fair value method. The adoption
of SFAS 123 is required for the fiscal year ended December 31, 1996. The Company
expects to apply APB 25 for measurement of stock compensation and will provide
disclosure required by SFAS 123 beginning in fiscal year 1996.

13. EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution plan which allows employees to
contribute up to 15% of their compensation to the plan. Employees who are at
least 20 1/2 years of age and have completed 6 months of service are eligible to
participate in the plan. The Company is required to match 50% of employee
contributions up to 3% of each employee's total compensation. The Company
contributed approximately $126,000 and $80,000 in matching funds to the plan
during the years ended December 31, 1995 and 1994, respectively.

The Company amended the defined contribution plan effective April 1, 1990
to add a nonmatching, discretionary contribution as determined by the Board of
Directors of the Company.

F-17
<PAGE> 81

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In January 1996, the Company announced a discretionary contribution of
approximately $290,000 which will be paid out of a reserve established during
1995.

In April 1995, the Company established an "Employee Stock Purchase Plan"
("ESPP"). Substantially all employees of the Company who have been continuously
employed for six months are eligible to participate in the ESPP under which
Common Stock is issued at quarterly intervals for cash at a price of 90% of the
fair market value of the stock. Under the ESPP, 3,749 shares were acquired by
employees for $41,000 in 1995. There is no charge to income as a result of
issuance of stock under this plan. At December 31, 1995, 96,251 shares of
unissued common stock were reserved for issuance under this plan.

14. COMMITMENTS AND CONTINGENT LIABILITIES

An employment agreement with one officer calls for an annual salary of
$150,000 in 1994 through 1996. As part of the employment agreement, the Company
will provide a Supplementary Employee Retirement Plan (SERP) based on a
contribution of 10% of total compensation. In addition, in 1993, two officers
each purchased 30,000 shares of the Company's common stock at the fair value of
$12.00 per share at the date of purchase. The purchase of stock was financed by
the Company with annual interest-only payable at 6% and principal due in April
and July 2000.

The Company has Long Term Incentive Plan Awards with two officers. Under
the arrangements, specific compensation and allowance payments were agreed to be
made in 1996 and 1997 if the company achieves certain performance objectives.
The estimated future payout is $706,000, of which $495,000 has been accrued as
of June 30, 1996.

In the normal course of business, the Company makes loan commitments
(unfunded loans and unused lines of credit) and issues standby letters of credit
to accommodate the financial needs of its customers. Standby letters of credit
commit the Company to make payments on behalf of customers under specified
conditions. Historically, no significant losses have been incurred by the
Company under standby letters of credit. Both arrangements have credit risk
essentially the same as that involved in extending loans to customers and are
subject to the Company's normal credit policies, including the obtaining of
collateral, where appropriate. At June 30, 1996, December 31, 1995 and 1994, the
Company's loan commitments amounted to $105.6 million, $72.8 million and $72.4
million, respectively. Standby letters of credit were $1.3 million, $1.5 million
and $655,000 at June 30, 1996, December 31, 1995 and 1994, respectively. In
addition, commitments under commercial letters of credit used to facilitate
customers trade transactions amounted to $2.5 million at December 31, 1995 and
1994.

The Company and its subsidiaries are from time to time defendants in and
are threatened with various legal proceedings arising from their regular
business activities. Management, after consulting with legal counsel, is of the
opinion that the ultimate liability, if any, resulting from these and other
pending or threatened actions and proceedings will not have a material effect on
the financial position or results of operations of the Company and its
subsidiaries.

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

The FASB's Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that
value. "Fair Value" is defined in SFAS 107 as the amount at which an instrument
could be exchanged in a current transaction between willing parties, other than
a forced or liquidation sale.

F-18
<PAGE> 82

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table summarizes carrying amounts and estimated fair values
of selected financial instruments as well as assumptions used by the Company in
estimating fair value:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1994
------------------- -------------------
ASSUMPTIONS USED IN CARRYING FAIR CARRYING FAIR
ESTIMATING FAIR VALUE AMOUNT VALUE AMOUNT VALUE
--------------------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks................ Approximately equal
to carrying value $ 18,244 $ 18,244 $ 11,357 $ 11,357
Interest-earning
deposits with
banks................ Approximately equal
to carrying value 12,635 12,635 2,301 2,301
Securities available for
sale................. Quoted market prices 22,675 22,675 2,718 2,718
Investment securities... Quoted market prices 19,541 18,661
Loans held for sale..... Approximately equal
to carrying value 1,367 1,367 1,612 1,612
Loans................... Discounted expected
future cash flows,
net of allowance for
loan losses 349,345 371,720 266,285 269,210
LIABILITIES
Deposits................ Fixed-rate
certificates of
deposit: Discounted
expected future cash
flows All other
deposits:
Approximately equal
to carrying value $361,875 $360,609 $268,692 $259,975
Federal Home Loan Bank
advances............. Discounted expected
future cash flows 25,000 24,585 17,000 16,106
Convertible subordinated
notes................ Discounted expected
future cash flows 2,695 2,695 2,735 2,591
</TABLE>

Off-Balance Sheet Financial Instruments

The fair value of commitments is estimated based upon fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
For fixed rate commitments, the fair value estimation takes into consideration
an interest rate risk factor. The fair value of guarantees and letters of credit
is based on fees currently charged for similar agreements. The fair value of
these off-balance sheet items at December 31, 1995 approximates the recorded
amounts of the related fees.

Concentration of Credit Risk

Substantially all of the Company's loans, loan commitments and core
deposits are geographically concentrated in Washington state.

F-19
<PAGE> 83

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. PARENT COMPANY FINANCIAL INFORMATION

CONDENSED BALANCE SHEET -- PARENT COMPANY ONLY

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks:
Subsidiary banks..................................................... $ 41 $ 9
Unrelated banks...................................................... 68 68
Interest-earning deposits with banks:
Subsidiary banks..................................................... 368
Unrelated banks...................................................... 651
Loans.................................................................. 905 905
Investments in bank subsidiaries....................................... 32,660 25,835
Premises and equipment, net............................................ 49 69
Real estate owned...................................................... 3,304 3,227
Other assets........................................................... 354 520
------- -------
Total Assets................................................. $37,381 $31,652
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities...................................................... $ 119 $ 56
Borrowed funds from subsidiary bank.................................... 2,600
Convertible subordinated notes......................................... 2,695 2,735
------- -------
Total liabilities............................................ 5,414 2,791
Shareholders' equity................................................... 31,967 28,861
------- -------
Total Liabilities and Shareholders' Equity................... $37,381 $31,652
======= =======
</TABLE>

F-20
<PAGE> 84

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED STATEMENT OF OPERATIONS -- PARENT COMPANY ONLY

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------ ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME
Interest on loans.............................................. $ 54 $ 54 $ 50
Interest on securities available for sale...................... 188 221
Losses on securities available for sale(1)..................... (270)
Interest-earning deposits:
Subsidiary banks............................................. 6 9 62
Unrelated banks.............................................. 16 31 17
Other.......................................................... 533 470 10
------ ----- -------
Total Income......................................... 609 482 360
EXPENSE
Compensation and employee benefits............................. 341 234 200
Interest....................................................... 377 246 367
Other.......................................................... 612 493 613
------ ----- -------
Total Expenses....................................... 1,330 973 1,180
------ ----- -------
Loss before income tax benefit and equity in undistributed net
income (loss) of subsidiaries................................ (721) (491) (820)
Income tax benefit............................................. (87)
------ ----- -------
Loss before equity in undistributed net income (loss) of
subsidiaries................................................. (721) (491) (733)
Equity in undistributed net income (loss) of subsidiaries...... 3,476 (123) (1,706)
------ ----- -------
Net Income (Loss).............................................. $2,755 $(614) $(2,439)
------ ----- -------
------ ----- -------
</TABLE>

- ---------------
(1) In November 1994, the Parent Company sold a mortgage-backed security to
Columbia Bank. A loss was recognized by the Parent Company while the
security was recorded at fair value by Columbia Bank. The proceeds from the
sale were subsequently contributed to the capital of Columbia Bank. On a
consolidated basis the loss recorded by the Parent Company is eliminated as
if no transaction had occurred.

F-21
<PAGE> 85

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED STATEMENT OF CASH FLOWS -- PARENT COMPANY ONLY

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................ $ 2,755 $ (614) $ (2,439)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Equity in undistributed earnings of subsidiaries...... (3,476) 123 1,706
Depreciation and Amortization......................... 34 40 16
Loss on sale of security available for sale........... 270
Decrease in loans held for sale....................... 2,021
Net changes in other assets and liabilities........... 2,698 80 (46)
------- ------- --------
Net cash provided (used) by operating
activities..................................... 2,011 (101) 1,258
INVESTING ACTIVITIES
Proceeds from sales of securities available for sale..... 2,808 599
Proceeds from maturities of securities available for
sale.................................................. 209
Loans originated or acquired, net of principal
collected............................................. (905)
Contribution of capital -- bank subsidiaries............. (3,100) (2,813) (16,279)
Purchase of real estate owned from bank subsidiary....... (3,100)
Purchases of premises and equipment...................... 34 (135)
Other, net............................................... (19)
------- ------- --------
Net cash provided (used) by investing
activities..................................... (3,100) 238 (19,389)
FINANCING ACTIVITIES
Proceeds from issuance of common stock................... 103 35 17,901
------- ------- --------
Net cash provided by financing activities............. 103 35 17,901
------- ------- --------
Increase (decrease) in cash and cash equivalents.... (986) 172 (680)
Cash and cash equivalents at beginning of period........... 1,095 923 1,603
------- ------- --------
Cash and cash equivalents at end of period............... $ 109 $ 1,095 $ 923
------- ------- --------
------- ------- --------
Supplemental information:
Cash paid for interest................................... $ 377 $ 246 $ 367
Issuance of common stock from conversion of convertible
subordinated notes.................................... 40 2,698
</TABLE>

17. STOCK DIVIDEND

On April 24, 1996, the Company announced a 5% stock dividend payable on May
22, 1996, to holders of record on May 8, 1996. On May 22, 1996, 164,051 common
shares were issued to shareholders. Average shares outstanding, net income per
share and book value per share for all periods presented have been retroactively
adjusted to give effect to this transaction.

18. SUBSEQUENT EVENTS (UNAUDITED)

On June 3, 1996, the Company gave notice that it would redeem all of its
issued and outstanding 7.85% Convertible Subordinated Notes (the "Notes") on
August 1, 1996. The Notes were convertible in whole or in part, in multiples of
$1,000 principal amount, at 100% of the principal amount of

F-22
<PAGE> 86

COLUMBIA BANKING SYSTEM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the Note (or portion thereof), at the conversion price per share of Common Stock
of $10.56. Prior to August 1, 1996 all of the Notes were converted into 223,743
shares of Common Stock.

Columbia Bank's deposits are insured by the FDIC through the Bank Insurance
Fund and through the Savings Association Insurance Fund (the "SAIF").
SAIF-insured deposits of Columbia Bank are a result of a so-called Oakar
transaction in which deposits were acquired from a savings bank. Legislation was
recently enacted with the intent of recapitalizing the SAIF fund. The
legislation required a special assessment on SAIF-insured deposits of
approximately 65.7 cents per $100 of insured deposits at March 31, 1995 (SAIF
deposits then $116.5 million) with a discount of 20% on the special assessment
for Oakar institutions, such as Columbia Bank, which meet certain tests. The
one-time special assessment, which is tax deductible, is estimated to be
$612,000 and will be reflected in third quarter 1996 earnings. The special
assessment is payable before November 29, 1996.

F-23
<PAGE> 87

COLUMBIA BANKING SYSTEM, INC.

SUMMARY OF QUARTERLY FINANCIAL INFORMATION(1)

Quarterly financial information for the years ended December 31, 1995 and
1994 is summarized as follows:

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR ENDED
QUARTER QUARTER QUARTER QUARTER DECEMBER 31,
------- ------- ------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1995
Total interest income................. $6,942 $7,775 $8,373 $8,630 $ 31,720
Total interest expense................ 3,093 3,699 4,092 4,275 15,159
------ ------ ------ ------ -----------
Net interest income................. 3,849 4,076 4,281 4,355 16,561
Provision for loan losses............. 300 300 320 330 1,250
Noninterest income.................... 883 950 1,078 1,080 3,991
Noninterest expense................... 3,987 4,124 4,267 4,169 16,547
------ ------ ------ ------ -----------
Income before income tax............ 445 602 772 936 2,755
Provision for income tax..............
------ ------ ------ ------ -----------
Net income............................ $ 445 $ 602 $ 772 $ 936 $ 2,755
------ ------ ------ ------ -----------
------ ------ ------ ------ -----------
Per share:
Net income (loss)................... $ 0.13 $ 0.17 $ 0.22 $ 0.27 $ 0.79
------ ------ ------ ------ -----------
------ ------ ------ ------ -----------
1994
Total interest income................. $4,202 $4,805 $5,497 $6,152 $ 20,656
Total interest expense................ 1,972 2,080 2,405 2,619 9,076
------ ------ ------ ------ -----------
Net interest income................. 2,230 2,725 3,092 3,533 11,580
Provision for loan losses............. 240 260 240 260 1,000
Noninterest income.................... 541 746 853 856 2,996
Noninterest expense................... 3,330 3,597 3,488 3,621 14,036
------ ------ ------ ------ -----------
Income (loss) before income tax..... (799 ) (386 ) 217 508 (460)
Provision for income tax..............
------ ------ ------ ------ -----------
Income (loss) from continuing
operations before extraordinary
item............................. (799 ) (386 ) 217 508 (460)
Extraordinary loss on extinguishment
of debt, net........................ (154 ) (154)
------ ------ ------ ------ -----------
Net income (loss)..................... $ (799 ) $ (386 ) $ 63 $ 508 $ (614)
====== ====== ====== ====== ==========
Per share:
Income (loss) from continuing
operations before extraordinary
item............................. ($0.23 ) ($0.11 ) $ 0.07 $ 0.14 ($ 0.13)
Extraordinary loss on extinguishment
of debt, net..................... (0.05 ) (0.05)
------ ------ ------ ------ -----------
Net income (loss)................... $(0.23 ) $(0.11 ) $ 0.02 $ 0.14 $ (0.18)
====== ====== ====== ====== ==========

</TABLE>

- ---------------
(1) These unaudited schedules provide selected financial information concerning
the Company which should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations in
this Prospectus.

F-24
<PAGE> 88

COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED FIVE-YEAR STATEMENT OF OPERATIONS(1)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans.............................. $ 30,038 $ 18,990 $ 12,258 $ 10,649 $ 8,701
Investment securities.............. 1,078 1,127 1,108 59 671
Securities available for sale...... 290 205 227 639
Deposits with banks................ 314 334 362 236 400
-------- -------- -------- -------- --------
Total interest income............ 31,720 20,656 13,955 11,583 9,772
INTEREST EXPENSE:
Deposits........................... 13,385 7,304 4,867 4,860 5,104
Federal Home Loan Bank advances.... 1,503 1,160 1,788 1,328 1,147
Other borrowings................... 271 612 876 735 383
-------- -------- -------- -------- --------
Total interest expense........... 15,159 9,076 7,531 6,923 6,634
-------- -------- -------- -------- --------
NET INTEREST INCOME................ 16,561 11,580 6,424 4,660 3,138
Provision for loan losses.......... 1,250 1,000 502 170 80
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses...... 15,311 10,580 5,922 4,490 3,058
Noninterest income................. 3,991 2,996 2,043 1,021 1,131
Noninterest expense................ 16,547 14,036 10,656 4,488 3,810
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before income tax... 2,755 (460) (2,691) 1,023 379
Provision for income tax........... 14
-------- -------- -------- -------- --------
Income (loss) from continuing
operations..................... 2,755 (460) (2,691) 1,023 365
Extraordinary loss on
extinguishment of debt, net...... (154)
Cumulative effect of accounting
change........................... 252
-------- -------- -------- -------- --------
NET INCOME (LOSS).................. $ 2,755 ($ 614) ($ 2,439) $ 1,023 $ 365
======== ======== ======== ======== ========
Per share (on average shares
outstanding):
Income (loss) from continuing
operations..................... $ 0.79 ($ 0.13) ($ 1.17) $ 0.89 $ 0.44
Extraordinary loss on
extinguishment of debt, net.... 0.79 (0.05)
Cumulative effect of accounting
change......................... 0.11
Net income (loss)................ 0.79 (0.18) (1.06) 0.89 0.44
Fully diluted net income
(loss)......................... 0.79 (0.18) (1.06) 0.76 0.44
Average number of common and common
equivalent shares outstanding:
Primary.......................... 3,496 3,481 2,301 1,155 824
Fully diluted.................... 3,752 3,740 2,560 1,700 824
======== ======== ======== ======== ========
Total assets at end of period...... $425,206 $319,072 $235,944 $158,694 $120,800
Long-term obligations.............. 27,695 19,735 39,081 27,975 19,117
Cash dividends.....................
======== ======== ======== ======== ========
</TABLE>

F-25
<PAGE> 89

COLUMBIA BANKING SYSTEM, INC.

CONSOLIDATED THREE-YEAR SUMMARY OF AVERAGE
BALANCES AND NET INTEREST REVENUE

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------- -------------------------------
INTEREST INTEREST INTEREST
AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE AVERAGE EARNED/ AVERAGE
BALANCE(1) PAID RATE BALANCE(1) PAID RATE BALANCE(1) PAID RATE
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans:
Commercial.............. $ 92,831 $ 8,986 9.68 % $ 63,541 $ 5,272 8.30 % $ 23,894 $ 1,690 7.07 %
Real estate(2):
One-to four-family
residential......... 97,280 9,073 9.33 78,408 6,495 8.28 73,076 6,221 8.51
Five or more family
residential and
commercial
properties.......... 90,135 8,411 9.33 57,952 5,324 9.19 35,255 3,608 10.23
Consumer................ 37,793 3,568 9.44 22,335 1,899 8.50 8,128 739 9.09
--------- -------- ------ --------- -------- ------ --------- -------- ------
Total loans........... 318,039 30,038 9.44 222,236 18,990 8.54 140,353 12,258 8.73
Securities................ 23,266 1,368 5.88 24,045 1,332 5.54 20,940 1,335 6.38
Interest-earning deposits
with banks.............. 5,336 314 5.88 8,597 334 3.89 12,800 362 2.83
--------- -------- ------ --------- -------- ------ --------- -------- ------
Total interest-earning
assets.............. 346,641 31,720 9.15 254,878 20,656 8.10 174,093 13,955 8.02
Noninterest-earning
assets.................. 28,007 24,384 15,825
--------- --------- ---------
Total assets.......... $374,648 $279,262 $189,918
--------- --------- ---------
--------- --------- ---------
INTEREST-BEARING
LIABILITIES:
Certificates of deposit... $168,351 $ 9,565 5.68 % $122,198 $ 5,595 4.58 % $ 75,682 $ 3,459 4.57 %
Savings accounts.......... 24,547 669 2.73 33,938 895 2.64 29,743 1,039 3.49
Interest-bearing demand
deposits................ 79,706 3,151 3.95 38,962 814 2.09 18,090 369 2.04
--------- -------- ------ --------- -------- ------ --------- -------- ------
Total interest-bearing
deposits............ 272,604 13,385 4.91 195,098 7,304 3.74 123,515 4,867 3.94
Federal Home Loan Bank
advances................ 24,915 1,503 6.03 21,452 1,160 5.41 25,875 1,788 6.91
Other borrowings.......... 2,744 271 9.88 6,017 612 10.17 9,868 876 8.88
--------- -------- ------ --------- -------- ------ --------- -------- ------
Total interest-bearing
liabilities......... 300,263 15,159 5.05 222,567 9,076 4.08 159,258 7,531 4.73
Demand and other
noninterest-bearing
deposits................ 42,167 26,238 10,621
Other noninterest-bearing
liabilities............. 2,444 1,476 923
Shareholders' equity...... 29,774 28,981 19,116
--------- -------- ------ --------- -------- ------ --------- -------- ------
Total liabilities and
shareholders'
equity.............. $374,648 $279,262 $189,918
--------- --------- ---------
Net interest income....... $16,561 $11,580 $ 6,424
-------- -------- --------
-------- -------- --------
Net interest spread....... 4.10 % 4.02 % 3.29 %
------- ------- -------
------- ------- -------
Net interest margin....... 4.78 % 4.54 % 3.69 %
------- ------- -------
------- ------- -------
Average interest-earning
assets to average
interest-bearing
liabilities............. 115.45 % 114.52 % 109.32 %
------- ------- -------
------- ------- -------
</TABLE>

- ---------------
(1) Loans on a nonaccrual status have been included in the computation of
average balances.

(2) Real estate average balances include real estate construction loans.

F-26
<PAGE> 90

- ------------------------------------------------------
- ------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 3
Incorporation of Certain Documents by
Reference........................... 3
Prospectus Summary.................... 4
Risk Factors.......................... 9
Recent Developments................... 12
Use of Proceeds....................... 15
Price Range of Common Stock........... 15
Dividends............................. 15
Capitalization........................ 16
Selected Consolidated Financial
Information......................... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 34
Supervision and Regulation............ 47
Taxation.............................. 51
Management............................ 52
Security Ownership of Certain
Beneficial Owners and
Management.......................... 58
Certain Transactions.................. 59
Description of Capital Stock.......... 59
Shares Eligible for Future Sale....... 61
Underwriting.......................... 62
Legal Matters......................... 63
Experts............................... 63
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>

- ------------------------------------------------------
- ------------------------------------------------------

1,285,000 SHARES

LOGO

COMMON STOCK

-------------------
PROSPECTUS
-------------------

ALEX. BROWN & SONS

INCORPORATED

RAGEN MACKENZIE

INCORPORATED

November 12, 1996

- ------------------------------------------------------
- ------------------------------------------------------